Why Lloyds Banking Group plc should be dealing above 115p!

Investor appetite for Lloyds (LSE: LLOY) — nay, the entire banking segment — remains hampered by a litany of worries, from hulking PPI-related bills to fears over a possible Brexit.

These concerns saw Lloyds’ stock value sink to three-year lows of 56p back in February. And although the firm has recovered ground since then — indeed, the bank was recently dealing around the 70p marker — I reckon Lloyds is still far too cheap at current levels.

Conventionally cheap

City forecasts certainly suggest that Lloyds remains grossly undervalued by the market. Although the financial giant is predicted to endure an 11% earnings fall in 2016 — to 7.5p per share — this still leaves Lloyds dealing on a P/E rating of just 9.2 times.

By comparison the broader FTSE 100 boasts a much higher average of 15 times. This is despite the index’s huge weighting towards the high-risk commodities sector, and with many of its constituent drillers and diggers also dealing on massive individual earnings multiples.

Silver miner Fresnillo, for example, deals on a colossal forward rating of 55.3 times, while oil play BP sports a corresponding reading of 30.2 times.

I believe Lloyds’ earnings prospects for the near-term and beyond are much more secure than those two stocks, and believe that an upward move towards the benchmark of 15 times is more than merited.

A subsequent share price re-rating would leave the bank dealing at 115p per share, indicating that Lloyds is undervalued by a stonking 64% at current levels.

Risk vs reward

That’s not to say Lloyds does not face risks of its own, of course. The threat of rising financial penalties is likely to remain a bugbear for Lloyds and its peers for some time yet. Still, a touted 2018 deadline provides long-term stability, even if the bank can expect a hefty rise for its existing £16bn PPI bill.

And while signs of British economic cooling also raise Lloyds’ risk profile — a situation that could worsen should the country slip out of the EU exit in June — the company’s focus on the relatively-stable high street at home at least makes it immune to the huge volatility washing over emerging regions.

I believe the troubles facing Lloyds are more than baked in at current share prices.

Payouts pounding higher

And Lloyds’ dividend forecasts lend further fuel to my argument that the share remains deeply undervalued. City brokers are braced for a full-year dividend of 4.4p per share for 2016, a consequent 6.7% yield smashing the FTSE 100 average of around 3.5% by some distance.

Lloyds’ chunky CET1 capital rating of 13% as of March gives it plenty of room to meet these forecasts — despite the threat imposed by rising financial penalties — and I believe the firm is in great shape to keep growing the payout beyond the current period.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK has recommended BP. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.