Every time I look at the Lloyds Banking Group (LSE: LLOY) share price, I just think it’s too low.
The trouble is, I’ve thought that for years. But the market, stubborn as it is, just won’t listen to me. Or is it me who should listen to the market?
Now Lloyds shares have moved ahead in the past couple of months, and hover around 50p, it’s time to ask myself one key thing. Is that as far as they’re likely to go, at least for now?
Looking cheap?
On fundamental measures, Lloyds shares still look cheap. There’s a forecast price-to-earnings (P/E) ratio of nine, dropping to six on 2026 forecasts. And a 5.4% dividend yield, which could approach 7% in that time. These suggest the price is too low.
Measures that are perhaps more useful to bank investors look bright too. We’re looking at a price to book ratio, which gives us an idea of a stock valuation compared to underlying assets, of about 0.8.
So Lloyds is worth less than the value of its assets? The future of its actual business isn’t worth anything?
On a related measure, the board expects a return on tangible equity of around 13 for 2024. In bank valuation terms, that’s strong.
Not all roses
But it can’t all be this good, right? Well, no, it isn’t. A few things count against Lloyds right now.
First is the prospect of interest rates cuts. They’d affect Lloyds business, like mortgage lending and general retail banking, in different ways. But the net result should be lower lending margins.
Then the forecast return on equity is below 2023’s figure. And there’s a good chance that 2025’s will be lower again.
And unlike some other banks, Lloyds no longer has any investment banking business to boost its profits. The 2008 bank crash showed how risky it can be. But at the same time, it’s potentially lucrative.
Regulation
UK banking regulations are a lot stronger now. So investment banking risk should be lower. But it might be a reason why Barclays, still big in that business, might be more profitable in the next few years.
Or why HSBC Holdings, with its focus on the China region, could have greater long-term appeal.
And speaking of regulation, Lloyds is preparing itself for a potential penalty. It’s just set aside £450m on the back of car loan mis-selling claims from the Financial Conduct Authority (FCA).
Doesn’t it seem like there’s some sort of banking scandal round every corner? It’s not helping sentiment towards the sector.
Share price
I’m no good at short-term predictions, so please just take this as a guess. But I really could see the Lloyds share price not getting much above 50p for at least the next couple of years. Until the economy settles, and we get a sight of the longer-term outlook.
But I wouldn’t mind that. I’d be happy to keep taking the dividends. And maybe buy some more shares.
