Lloyds (LSE: LLOY) shares have taken a hit recently on the back of the banking crisis in the US. Currently, they can be snapped up for less than 50p each.
Is this a great time to invest in the bank? Let’s discuss.
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Value on offer?
At first glance, Lloyds shares do appear to offer some value right now. Currently, City analysts expect the bank to generate earnings per share of 7.65p this year. This means that at the current share price, the forward-looking price-to-earnings (P/E) ratio here is just 6.5. That’s low. The median P/E across the FTSE 100 right now is about 14.
Meanwhile, Lloyds currently has a price-to-book ratio of just 0.7. Generally speaking, a ratio under one signals that a stock is undervalued.
As for the dividend, the trailing yield here is around 5% right now. That’s higher than the UK market average.
Putting this all together, the shares now look quite cheap.
Cheap for a reason?
Having said that, cheap stocks are often cheap for a reason.
And that could be the case here. One major issue to consider is uncertainty in the global banking system. Now I don’t think Lloyds is likely to face a liquidity crisis like Silicon Valley Bank did. Ultimately, the current banking crisis appears to be very specific to the US.
However, Lloyds could suffer from tighter liquidity rules from financial regulators that come about as a result of the current banking crisis. Such rules could hit future earnings.
Another issue to take into consideration is the weak state of the UK economy. Back in January, the Financial Conduct Authority (FCA) said that more than three quarters of a million UK households are at risk of defaulting on their mortgage payments in the next two years, now that rates are much higher.
Given that Lloyds is the largest mortgage lender in the UK, this could be a problem for the bank. This could also hurt profits.
Finally, advances in financial technology (FinTech) are another major risk to think about here. The role of banks is to take deposits, provide loans, and make payments. However, as Fundsmith manager Terry Smith recently pointed out, all of these roles are now being done by FinTech businesses (often far more efficiently). So the long-term outlook for traditional banks like Lloyds is a bit unclear.
My view
Of course, there are reasons to be positive on Lloyds shares. Higher interest rates are one and these have boosted net interest income for the bank.
Share buybacks are another. In its full-year 2022 results, the group announced a £2bn buyback. When companies buy back their own shares, they boost their earnings per share (assuming earnings stay constant).
However overall, the outlook, both in the short term and the long term, is a little opaque right now, in my view.
As such, I’m not convinced Lloyds shares are an amazing investment at current levels. To my mind, there are more attractive stocks to buy today.
