The Lloyds Banking Group (LSE: LLOY) share price has risen by a healthy 53% over the last 12 months. But UK-focused rivals Natwest Group and Barclays have done better, gaining 87% and 63% respectively.
Lloyds looks cheap to me and offers a tempting 5% dividend yield — more than rivals. Should I snap up this high-yield favourite for my income portfolio — or is there a reason why the bank’s shares are lagging behind? I’ve been taking a fresh look.
What’s inside Lloyds?
Lloyds is one of the biggest providers of everyday banking services to consumers and businesses in the UK. As the owner of brands including Halifax and Bank of Scotland, Lloyds is also the UK’s biggest mortgage lender.
Less obviously, Lloyds is one of the UK’s largest providers of motor finance and leasing (Black Horse and Lex Autolease), credit cards (MBNA) and retirement products (Scottish Widows).
Unlike Barclays and Natwest Group, Lloyds doesn’t operate abroad, and doesn’t have an investment banking division. In my view, buying shares in Lloyds is really a pureplay investment in the UK economy — especially housing.
I think this may be one reason why the share price has cooled since May — mortgage rates have continued to fall and the latest government data shows housing sales slowing since the stamp duty holiday ended in June.
Too much housing?
One potential concern for me with Lloyds is the company’s plan to become one of the UK’s biggest rental landlords. Through a partnership with FTSE 100 housebuilder Barratt Developments, Lloyds plans to enter the build-to-rent market.
In other words, the bank will pay to build the houses, and then rent them out. I suspect Lloyds is doing this to try and improve its return on equity. I’d expect rental property to generate higher returns than financial assets such as government debt, given today’s low interest rates.
However, I feel that this plan carries some risk. While Lloyds is a very experienced mortgage lender, it does not have any experience as a residential landlord. As a high-profile business, it will need to build a good reputation with tenants, while keeping costs under control.
Will Lloyds’ share price rise in September?
The bank’s results for the first half of 2021 showed a fairly flat picture. Underlying pre-tax profit was £3,409m, down by 4% compared to the first half of 2020. It’s too soon to be sure how the rest of the year will turn out, but broker forecasts suggest that profits will peak this year before falling by around 20% in 2022.
Making money from lending money gets more difficult when interest rates are so low, especially as the mortgage market is very competitive at the moment. The group’s size means that efforts to improve profitability, such as build-to-rent, take time to deliver results.
As I write, Lloyds’ share price is hovering around 44p. That’s a discount of about 20% to its tangible book value of 55.6p per share. Dividend forecasts suggest a yield of 5% from current levels.
Overall, I think Lloyds’ shares are cheap at the moment. But until the bank proves it can deliver a sustained improvement in profitability, I think the shares are only likely to rise slowly. I don’t expect big gains in September — but I would be happy to buy the shares for income.
