Are Lloyds shares a bargain now at 47p or should I sell my holding?

With a new mis-selling scandal in the making and banks’ net interest rate margins set to fall anyhow, Lloyds shares look too risky now for me.

| More on:
Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Lloyds (LSE: LLOY) shares are down 9% from their 7 March 12-month high of 51p as I write. This raises the question for me of whether they are now into bargain territory or whether I should finally sell my holding.

To ascertain whether they are a bargain, I began by looking at the key price-to-earnings (P/E) measurement.

Lloyds currently trades at a P/E of 6.1. NatWest is at 4.8, Barclays at 6, HSBC Holdings at 6.5, and Standard Chartered at 7.6, giving an average of 6.2.

Against this then, Lloyds is not notably undervalued.

To double-check the finding, I then looked at the price-to-book (P/B) measurement. Lloyds is trading at 0.6, with Barclays at 0.4, Standard Chartered at 0.5, NatWest also at 0.6, and HSBC Holdings at 0.8.

This gives a peer group average of 0.6 – the same as Lloyds, so no undervaluation there either.

How does the business look?

2023’s results released on 22 February showed statutory profit after tax increased 41% — to £5.5bn from £3.9bn in 2022.

Like other banks in the UK, much of this jump in profitability came from a high net interest margin (NIM). This is the difference between the interest it receives on loans and the rate it pays for deposits.

The strong NIM resulted from high interest rates required to combat rising prices. The Lloyds NIM was 0.17% higher in 2023 than in 2022 – at 3.11% against 2.94%.

However, inflation has now fallen from its 11% high of 2022 to around 4%. So analysts expect interest rates may have peaked as well. This will bring the banks’ NIMs down, and very probably profits with them.

However, a declining interest rate margin may turn out to be the least of the bank’s problems.

Alongside its 2023 results was £450m set aside to cover a Financial Conduct Authority investigation into mis-selling car loans.

Analysts estimate that the investigation might conclude in fines costing the entire car financing industry up to £16bn. Lloyds owns the UK’s largest motor finance provider — Black Horse.

Should I buy, hold, or sell?

Given the current share price of just 47p, each penny represents just over 2% of the value of the stock.

That means its entire annual yield of 5.9% currently could be wiped out with just a 3p price move!

If I was starting out in my investment life, this would not bother me so much. Long-term investing – over decades – allows a company time to re-establish any value lost through short-term blips.  

It also allows for the flattening out over time of any short-term shocks seen in the market more widely.

But I am over 50 now, so I am looking to minimise undue exposure to risky stocks.

I do not want to wait around for an unspecified time for a stock to recover from a sharp fall. And this risk dramatically increases the lower-priced a stock is, due to simple mathematics.

Given this, I am looking to sell my holding in Lloyds in the very near future.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

HSBC Holdings is an advertising partner of The Ascent, a Motley Fool company. Simon Watkins has positions in Lloyds Banking Group Plc and NatWest Group Plc. The Motley Fool UK has recommended Barclays Plc, HSBC Holdings, Lloyds Banking Group Plc, and Standard Chartered Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Asian man looking concerned while studying paperwork at his desk in an office
Investing Articles

10%+ yield! I’m eyeing this share for my SIPP in May

Christopher Ruane explains why an investment trust with a double-digit annual dividend yield is on his SIPP shopping list for…

Read more »

Investing Articles

Will the Rolls-Royce share price hit £2 or £6 first?

The Rolls-Royce share price has soared in recent years. Can it continue to gain altitude or could it hit unexpected…

Read more »

A senior man and his wife holding hands walking up a hill on a footpath looking away from the camera at the view. The fishing village of Polperro is behind them.
Investing Articles

How much should I put in stocks to give up work and live off passive income?

Here’s how much I’d invest and which stocks I’d target for a portfolio focused on passive income for an earlier…

Read more »

Google office headquarters
Investing Articles

Does a dividend really make Alphabet stock more attractive?

Google parent Alphabet announced this week it plans to pay its first ever dividend. Our writer gives his take on…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

Could starting a Stocks & Shares ISA be my single best financial move ever?

Christopher Ruane explains why he thinks setting up a seemingly mundane Stocks and Shares ISA could turn out to be…

Read more »

Investing Articles

How I’d invest £200 a month in UK shares to target £9,800 in passive income annually

Putting a couple of hundred of pounds each month into the stock market could generate an annual passive income close…

Read more »

Investing Articles

How much passive income could I make if I buy BT shares today?

BT Group shares offer a very tempting dividend right now, way above the FTSE 100 average. But it's far from…

Read more »

Investing Articles

If I put £10,000 in Tesco shares today, how much passive income would I receive?

Our writer considers whether he would add Tesco shares to his portfolio right now for dividends and potential share price…

Read more »