I wrote an article on Lloyds (LSE: LLOY) and FTSE 250 bank Close Brothers Group (LSE: CBG) back in January 2018. At the time, Lloyds shares were 71.26p and CBG’s were 1,597p.
Noting CBG’s conservative management had turned cautious in some of its business lines (in contrast to Lloyds), I had “concerns we may be entering a less profitable period for banks in the economic cycle.” I rated CBG a ‘hold’, but suggested avoiding LLOY. Times change.
Lloyds shares and CBG shares today
Both banks’ shares are a lot lower today than when I wrote the 2018 article. At a current price of 24.29p, Lloyds shares have slumped a whopping 66%. Meanwhile, at 999p, CBG shares are down 37%.
Are these bank stocks now worth buying at their discount prices? And, if so, is one a better buy than the other?
Going into recession
The market wasn’t expecting a global pandemic in 2020. However, the triggers for a recession are nearly always unexpected. The UK’s averaged a recession once a decade since World War II. As such, 10 years on from the great rout of 2008/09, it was clear we were getting ever deeper into the danger zone for the next one.
With this in mind, I was concerned Lloyds had been ramping up its exposure to riskier lending, such as unsecured debt. Ahead of the pandemic, it was also leveraging its 0.3% return on assets (ROA) by 17.5% to produce a 5% or so return on equity (ROE).
By contrast, CBG came into 2020 having reduced its already-limited unsecured lending to virtually nil. Also, it was leveraging its healthy near-2% ROA by just 7.5% for an ROE of close to 15%.
Long-term and shorter-term
As I’ve noted in the past, CBG has long been a more prudently managed business than Lloyds. This is reflected in its much superior long-term shareholder returns over the last quarter of a century.
However, I wouldn’t necessarily shun the shorter term buy-low-and-sell-on-recovery opportunity banking stocks like LLOY presents from time to time. Is now one of those times? And if it is, is LLOY a better buy than CBG?
Valuation: Lloyds shares vs CBG shares
The table below shows some basic valuation metrics for the two banks. These are based on current share prices, trailing 12-month earnings and dividends, and period-end tangible net asset values (TNAV).
|
|
LLOY (period end 30 June 2020) |
CBG (period end 31 July 2020) |
|
P/TNAV |
0.47x |
1.25x |
|
P/E |
48.6x |
13.7x |
|
Dividend yield |
0% |
4% |
As far as CBG is concerned, I don’t think price-to-TNAV is a particularly helpful measure. This is due to the group’s asset management business (which I’d value on a multiple of assets under management), and its Winterflood market-making business (which I’d value on an earnings multiple). Adjusting for these, and on its P/E and dividend yield, I rate CBG a ‘buy’.
I’m not too concerned by LLOY’s sky-high P/E and zero dividend yield. In fact, I view them as quite positive for a mainstream bank at this stage of the economic cycle.
Personally, I reckon a P/TNAV of 0.33 for a bank like Lloyds offers a really comforting margin of safety. But I’d begin to see the stock as eminently buyable at around 0.4 (a share price in the 21p region). Therefore, at the current price of 24.29p and P/TNAV of 0.47, I’d watch Lloyds shares very carefully for a dip.
