The Lloyds (LSE: LLOY) share price enjoyed a solid end to the year, rising 13.21% in the last three months. I’m delighted, because I bought the stock on 2 June and 9 September, and ended the year comfortably ahead. I recently reinvested my first dividend.
Nothing will part me from my Lloyds shares today. I plan to hold them for years, and with luck, decades.
I was even toying with the idea of buying more of them, but now I’m wondering if there’s a better opportunity elsewhere in the sector. Derren Nathan, head of equity research at Hargreaves Lansdown, reckons that unloved FTSE 100 rival NatWest Group (LSE: NWG) looks great value today.
Battle of the banks
NatWest had an annus horribilis in 2023, its shares ended the year 16.97% lower, after the Nigel Farage debanking scandal forced CEO Alison Rose to resign. By contrast, my Lloyds shares rose 5.86% over 12 months.
Nathan says that “based on analyst forecasts for forward earnings, NatWest’s valuation is now at close to 10-year lows”. My ears pricked up at that. I love buying profitable companies when they’re cheap. Or to use Nathan’s words, when “weak investor sentiment does not reflect the longer-term prospects”.
NatWest is making money, recently posting a Q3 operating profit before tax of £1.33bn. However, this was lower than expected. It suffered as mortgage margins were squeezed by competition and customers shifted cash into higher-interest savings accounts.
As interest rates peak, net interest margins (which measure the difference between what banks pay savers and charge borrowers) will inevitably fall. However, after a sharp drop in the final quarter of 2023, Nathan reckons margins could now stabilise.
Much depends on how quickly inflation falls, and whether the Bank of England is swift to slash interest rates when it does. Happily, NatWest’s debt provisions for defaults are better than first thought. As mortgage rates fall, defaults are likely to stay low. NatWest has relatively low exposure to higher-risk unsecured lending, which will help.
NatWest shares could rebound faster
NatWest is slightly cheaper than Lloyds. It trades on a forecast price-to-earnings ratio of 5.28 for 2023 and 5.75 for 2024. That compares to 6.64 and 7.31 for Lloyds.
NatWest’s forecast 2023 yield is punchier at 7.52%, and markets reckons it’s broadly sustainable too, forecasting 7.31% in 2024. Lloyds shares should yield slightly less, with a forecast of 5.81% in 2023 and 6.32% in 2024. That’s still a solid rate of income.
Nathan notes that the NatWest CET1 ratio, which shows how well capitalised banks are, is “very comfortable” at 13.5% and underpins the dividend. Lloyds is strong on this front too, with a CET1 of 14.8%.
I love my Lloyds shares but I’m tempted to take a stake in NatWest today. There’s a real opportunity but one thing worries me. Chancellor Jeremy Hunt said in his 2023 Autumn Statement that he’d investigate selling the government’s 38% stake in NatWest.
I’m assuming he’ll have to offer some kind of discount to tempt investors, and maybe I should wait for that. However, if NatWest starts climbing before then, I’ll kick myself. I’ll buy its shares when I have the cash. Hopefully this month – and definitely if markets dip. They’ll sit nicely alongside my long-term stake in Lloyds.
