On paper the Lloyds Banking Group (LSE:LLOY) share price seems to offer unmissable all-round value.
City analysts think the FTSE 100 bank’s earnings will rise 5% in 2023. This leaves it trading on a forward price-to-earnings (P/E) ratio of just 6.7 times.
Lloyds shares also offer a 5.5% dividend yield for this year. That’s far above the FTSE index average of 3.6%.
But I won’t be buying the Black Horse Bank for my investment portfolio today. If I had cash to spare I’d rather buy other UK banking shares.
Threats to Lloyds
Rising interest rates will provide a boost to Lloyds’ profits column in 2023. Higher rates let banks make more money by raising the difference between the interest they charge borrowers and the interest they pay out to savers.
But in my opinion, buying UK-focused cyclical shares like high street banks is too risky. To me, the benefit of Bank of England rate rises is outweighed by the threat of soaring loan defaults and insipid revenues as the British economy shrinks.
Conditions in the UK could remain tough for years to come too. This is because of major structural problems like weak productivity, labour shortages and weak business investment. A report from thinktank the Institute for Public Policy Research shows that Britain ranks 35 out of 38 OECD nations in terms of investment.
Better bank stocks?
For this reason I’m happy to look past Lloyds shares and find other banking stocks. Banco Santander (LSE:BNC) and HSBC Holdings (LSE:HSBA) are a couple I’d prefer to buy.
Like Lloyds, these businesses will also benefit from further central bank rate hikes in 2023. But unlike their rival they have operations that span the globe.
This reduces the risk to investors as group profits aren’t dependent on strength in one or two economies. It also means that both HSBC and Santander offer exposure to emerging markets.
The former is a major player in Asia and is doubling down on investment here. It will spend $6bn through to around 2027 in sectors like wealth management and commercial banking in order to deliver “double-digit growth.”
Meanwhile, Santander is a big player in major Latin American economies including Brazil, Mexico and Argentina. Its Polish division also allows it to capitalise on increasingly wealth Eastern European customers.
Top value stocks
Like Lloyds shares, these banks also expose investors to certain risks. Continued weakness in the Chinese property market and high Covid-19 cases there poses a danger to HSBC.
Weak commodity prices, meanwhile, could impact economic conditions in South America and therefore profits at Santander. However, as a long-term investor I believe the rewards of owning the stocks more than offsets these risks. And at current prices I think they offer excellent value.
Both Santander and HSBC trade on forward P/E ratios of between 6 and 7 times. What’s more, their dividend yields for 2023 sit at a healthy 5.4% and 7.1% respectively. I think the two banks are great investments for value investors like me.
