Lloyds (LSE:LLOY) shares haven’t displayed the stability one might expect from a banking giant this year. The largest UK retail and commercial financial services provider has seen its share price fluctuate between 38p and 55p amid a series of pressures. These pressures include higher inflation, higher interest rates and a cost of living crisis.
Today, Lloyds is trading towards the bottom end of its yearly range with economic concerns heightened. But I see this as a good opportunity for me to buy. Lloyds will probably never reach its pre-financial-crash heights, but there are signs the share price could really pick up. So, here’s why I’m bullish on Lloyds.
Valuation
Lloyds has a price-to-earnings (P/E) ratio of just 5.8. That’s very cheap, especially for a banking giant that should have a positive future ahead of it. Its forward P/E — based on projected earnings for the year — also looks pretty cheap at just 6.2.
Here’s how Lloyds compares with other UK banking majors.
| Stock | P/E ratio |
| Lloyds | 5.8 |
| HSBC | 10.1 |
| Barclays | 4.1 |
| NatWest | 9.25 |
Recent performance
In April’s quarterly update, Lloyds beat expectations, posting pre-tax profits of £1.6bn. This was down from £1.9bn the year before, but ahead of analysts’ forecasts of £1.4bn. As the UK’s largest mortgage lender, Lloyds benefited from rising Bank of England base rates. This also led it to revise its guidance upwards for returns on tangible equity and net interest margin. The group forecast a banking net interest margin of 270 basis points, up from 260. Further interest rate rises, which appear likely, will boost the margin further.
One reason for the falling profitability was a £177m charge meant to protect the bank from potential defaults linked to the inflationary pressures. This was in stark contrast to the year before when Lloyds released £360m of the cash originally put aside for Covid-related impairments.
Prospects
I’m bullish on Lloyds’ long-term prospects. The bank is the UK’s largest mortgage lender. And mortgages account for 71% of its loans. So, there may be some short-term pain if higher interest rates dampen demand for new homes.
But I’m confident that the UK’s property market will remain strong in the long run, primarily because successive governments have failed to address housing shortages. It’s also true that higher interest rates could benefit the bank’s mortgage lending in the long run. By historic standards, rates over the last decade have been extraordinarily low. But if house buyers become accustomed to slightly higher rates, the bank would benefit considerably.
I’m also excited by Lloyds’ move to become a property owner. The bank intends to buy 50,000 homes over the next decade. This will add more diversity to its operations, although still with a heavily weighing towards property.
It has attempted to diversify in other ways, offering more financial services to its customers, but it may be a while before we see the impact.
Will Lloyds soar?
I think Lloyds could do very well in the coming years. For me, it currently looks particularly cheap compared to some of its peers, and I think the bank’s weighing towards property will be beneficial in the long run. I’ve already bought Lloyds shares and would buy more.
