Lloyds Banking Group (LSE: LLOY) shares have risen 10% since Christmas. The high street bank’s stock has been one of the factors that’s helped lift the FTSE 100 to within a whisker of its all-time high.
Although Lloyds’ share price is still below its pre-pandemic level, it certainly seems to be moving in the right direction. Is this the last chance for UK investors to pick up this banking stock at a bargain price?
Why I’m bullish about banks
For many Britons, rising interest rates have been bad news. Anyone needing to re-mortgage recently will certainly have felt some pain.
However, higher interest rates have been good news so far for the UK’s big banks. During the first nine months of last year, Lloyds underlying net interest income rose 15% to £9,598m.
Rising rates have allowed the bank (and its rivals) to increase mortgage rates more quickly than savings interest rates. This has boosted banks’ profit margins, despite leaving a bad taste in the mouth for savers, who’ve seen the value of their savings eaten up by inflation over the last year.
What are the risks?
I’m not surprised to see banks attempting to rebuild their profit margins after years of ultra-low rates. But this situation isn’t without risk for them.
For one thing, savers might choose to move their cash elsewhere, to savings providers offering more competitive rates. I certainly have done.
A second risk is that the UK housing market is slowing as homeowners worry about recession risks and falling house prices. If mortgage demand eases, big lenders like Lloyds might have to try harder to stay competitive.
In a worst-case scenario, the bank’s increased profits could be eaten up by higher levels of bad debt on credit cards, loans and mortgages.
Are Lloyds shares still cheap?
Every stock market investment comes with risks as well as potential rewards. One of the ways I manage risk is to try and make sure I don’t pay too much when I buy shares.
The good news is that Lloyds still ticks plenty of boxes for value, in my view.
At current levels, the shares are trading on a 2023 forecast price-to-earnings (P/E) ratio of 6.5, with an expected dividend yield of 5.6%. Those numbers look attractive to me.
Another number I look at is the stock’s price-to-book ratio. This compares the share price to the bank’s net asset value. Lloyds shares are currently trading broadly in line with its last reported book value of 49p per share. That’s probably decent value, in my view.
I can’t be sure how Lloyds shares will perform over the coming year and beyond. But my analysis suggests the bank’s profits — and share price — could continue to perform well from current levels.
Although the outlook for the economy is uncertain, my sums suggest that Lloyds dividend should remain easily affordable, unless conditions become much worse than expected.
I think Lloyds could be a good choice today for investors seeking a reliable dividend income.
Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group Plc. 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.
Motley Fool UK 2023