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Have £1,000 to invest? I think the Lloyds share price is a bargain

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The Lloyds (LSE: LLOY) share price is now trading at around 31p. It means the UK banking group has shed half its value so far this year. For investors with £1k, or any other amount, now could be a prime opportunity to buy at low cost into a bank with a simple business model — lending to UK businesses and consumers.

I know that banks are unlikely to have been your best investment over recent years. The Lloyds share price in particular never recovered from the 2008 crash. But, after much restructuring, Lloyds is now a more focused business.

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Furthermore, the compensation payments from the PPI scandals have largely been paid. These payments weighed on profitability for years, indirectly affecting shareholder returns.

The last decade has been tough for Lloyds. However, I think the bank was in a good position before the coronavirus-induced market crash.

Weak share price but strong fundamentals 

The disappointing past performance of the Lloyds share price is likely to be on the minds of many investors. But what happened in the past doesn’t have to be repeated in the future and it’s important to look at the evolving business fundamentals underneath. It’s here that you’ll see the Lloyds share price doesn’t reflect its changing business.

For starters, 31p now buys you a tangible asset per share of 61p. This means that for every £1 you pay, you get almost £2-worth of bank. Admittedly, many banks will trade on less than net asset value as returns are often low. But Lloyds has a return on equity (ROE) of 5%, above Barclays‘ ROE of just under 4%. 

Profitability will likely be low across the banking sector for as long as ultra-low interest rates persist. However, banks need to attract investors, which is why they’re known for being dividend stocks. Consequently, it’s likely they’ll want to reinstate dividends as soon as possible.

Lloyds’ 10% total dividend yield for 2019, compared favourably to other banks, notably to Barclays’ 2.8%. Besides, Barclays offered a scrip dividend, where investors take shares instead of cash. This inflates the dividends per share figure and makes Barclays’ balance sheet look stronger. Assuming a similar approach to future dividends, Lloyds shares are the better offer in my view. 

Financials compare favourably with Barclays

Scrip dividends and other accounting measures can make it hard to compare banks. Consequently, two main ratios can be used to make comparisons easier. These are net interest margins and return-on-asset ratios. Lloyds compares favourably with its peers on both.

Net interest margins are — effectively — the profit the bank makes on its lending. Lloyds does this relatively well. At just under 3%, its margin is slightly lower than that of Barclays (just over 3%). However, the Barclays figure includes money from its investment banking division. Lloyds’ number is purely on lending to UK customers, indicating its higher efficiency.

The return-on-asset ratio is the per-pound profit a bank will earn on its assets. As banks are highly leveraged, these figures are small. I calculated a ROA of 0.36% for Lloyds against 0.29% for Barclays. Using this measure, Lloyds uses its assets more profitably.

It’s likely that for the immediate future, low profitability will continue due to ultra-low interest rates. However, for patient value investors, the Lloyds share price could be a bargain for a strong and sustainable business.  

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Rachael FitzGerald-Finch has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays and Lloyds Banking Group. 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.

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