The Lloyds Banking Group (LSE: LLOY) share price is up 17% in 2024 so far, and it’s up 29% in two years.
Could this be the best we’re going to get, even though we’re still looking at a 1% fall in five years? If I thought so, I might sell. But I don’t plan on that.
Changing sentiment
Market sentiment’s clearly changed in 2024. And, for the first time in a long while, it looks like investors see banks in a better light. Or at least they don’t seem to rate them as quite the pariahs they once did.
As ace investor Ben Graham once noted that in the short term, investors tend to follow the markets, follow their emotions… anything but rationality. But in the long term, fundamental valuations win through.
And even during the 2020 stock market crash, Lloyds still looked financially healthy and in no danger of going under.
Still, market sentiment’s hard to read, and I might have read it wrong.
Interest rates
People are split on the effect an interest rate fall will have on the UK’s banks. On the one hand, lower rates can cut into a bank’s lending margins and damage its profits.
In Q1, Lloyds’ underlying net interest income already dropped 10%, to £3.2bn. Results were lower across the board than the same quarter of 2023.
Then again, it’s no good worrying about what interest a bank can charge people who aren’t actually borrowing money. As the UK’s biggest mortgage lender, Lloyds has taken a hit from the property market slowdown.
I’m hoping that more mortgage borrowers, even at lower rates, will mean bigger profits. So please Bank of England, I’d like a cut.
Too cheap
My final reason is that I think the Lloyds share price is just too low on fundamental measures, which ties in with the thing about sentiment.
The stock’s forward price-to-earnings (P/E) ratio has risen to 9.7, as the shares have gained in 2024. Many will see that as fair value for a stock in the risky finance sector right now. And I have to confess, I’d say there’s a fair chance they’re right.
But with forecasts putting the P/E as low as 6.5 by 2026, and the dividend yield up to 6.8%? Come on market, you know that’s too cheap. What’s that? Forecasts are often wrong, and you say I’ve been getting Lloyds wrong every year for years?
Wrong again
Both those points are fair. The economy’s still in a bit of a mess, and I’d guess it will be a few years yet before we’re back to normality.
Set against that, the Lloyds valuation might be about right now. And we might need actual results before things get better.
But if the Lloyds share price doesn’t end 2024 higher… well, I’m in it for the long term, and there’s always next year.
