Lloyds shares may be cheap, but I think other banking stocks offer better value

Lloyds Banking Group (LSE:LLOY) shares are 26% cheaper than they were in December 2019. Since then we’ve had to contend with a global pandemic, inflation and falling growth.

The other retail banks in the FTSE 100 have faced the same economic conditions, yet haven’t suffered as much. Over the same period, the share prices of Barclays and NatWest Group have fallen by 14% and 9%, respectively. More impressively, HSBC‘s has gone up 6%.

Different markets

I think much of this differential is explained by Lloyds’ exposure to the UK economy, and the property market in particular.

Nearly all its revenues are generated here. And it has a 20% share of the domestic mortgage market. Inflation has remained stubbornly high in the UK, while interest rates have risen faster — and more steeply — than in some other parts of the world.

However, NatWest finds itself in a similar position. But it reported a higher return on capital employed (ROCE) for the nine months ended 30 September 2023. Its ROCE was 17.1%, compared to 16.6% for its larger rival. I suspect this is the reason why its shares have performed better.

In contrast to this, HSBC has more of an international focus and a major presence in Asia, which is currently the fastest growing region. This could explain why its ROCE for the same period is a more impressive 19.7%.

Getting into the detail

A traditional way to value banks is to look at the price-to-book ratio.

What’s this all about? Essentially, if they were to cease trading today and sell-off their assets, collect all amounts owed and repay every liability, it explains how much cash per share there would be left to give to shareholders.

On this measure, Lloyds doesn’t fare as well as its rivals.

As a shareholder, I find this disappointing.

But I bought the bank’s shares for its dividends rather than in anticipation of huge future growth. The consensus forecast of the 20 analysts covering the stock, is for a dividend of 2.7p in 2023. If correct, the shares are presently yielding 6.1%.

But although I’m happy with this level of return, again the others do better.

NatWest is expected to pay 16.8p this year, a yield of 8.2%. If Barclays increases it final payout by 20% — the same amount by which it put up its interim dividend — its stock would be paying 6.2%.

And although HSBC’s current return is ‘only’ 5.3%, it has promised to pay a special dividend in early 2024, if it concludes a deal to sell its operations in Canada. If realised, this would mean a current yield of over 8%.

Future outlook

Unless the prospects for the UK economy improve significantly, over the short term I can’t see any major upward movement in the Lloyds share price.

But I can’t see it going much lower either.

Lloyds’ net interest margin — the difference between the amount it charges on loans and how much it pays on deposits — was 3.15% for the first nine months of 2023. And despite expectations of falling interest rates, it’s expected to remain around this level until at least 2026.

It’s also good at managing its costs.

However, on paper I have to acknowledge that other FTSE 100 banking stocks presently appear to be cheaper.