After Lloyds (LSE:LLOY) reported a solid set of third-quarter results in an interim management statement, released on 25 October 2023, it’s hard to deny that the bank’s outlook feels optimistic.
Despite this, the shares are down 13% since the beginning of the year. In addition, they’re approximately 27% lower than they were five years ago.
All of this means that the bank’s valuation still sits at a severely discounted level. As such, I’m convinced that now could be an ideal right time to load up on some dirt-cheap shares.
Beating profit forecasts despite a reduction in lending
The third-quarter profits reported by Lloyds were better than expected. To illustrate, statutory profit before tax was £1.9bn in the third quarter. That’s slightly above forecasted expectations of £1.8bn.
What’s interesting is that the jump in third-quarter profits comes despite a reduction in lending to customers amid tough macroeconomic conditions. For that, Lloyds has higher interest rates to thank.
But it wasn’t all good news. Net interest margin (NIM), which is a measure of profitability in borrowing/lending, fell to 3.08%. This figure is down from 3.14% in the previous quarter and is slightly lower than what the markets had expected.
The key risk consideration here is that a declining NIM indicates that a bank is earning less from its core lending activities. Put simply, banks make money by borrowing at lower interest rates and lending at higher rates. Thus, a shrinking NIM suggests reduced profitability in this essential operation.
That said, it’s encouraging that management remains confident enough to reiterate full-year guidance of NIM over 3.1%.
A generous dividend yield
Capital levels at Lloyds remain strong. So much so that they not only support dividend payments, but also set the stage for returning surplus capital at the end of the fiscal year. That’s an attractive proposition for those seeking dividend income.
The prospective dividend yield sits at a whopping 7.5%, far exceeding the FTSE 100 average. But as always, nothing is guaranteed. After all, economic downturns, unexpected expenses, or changes in market conditions can affect a company’s ability to distribute shareholder payouts.
Waiting for the market to recognise the value
Despite the performance boost from higher interest rates, Lloyds continues to trade at a 30% discount to the book value of its assets.
But as the group continues to deliver consistent profitability and capital returns to shareholders, it feels to me like it’s only a matter of time before patient investors are finally rewarded.
Although for that to happen, the market will have to recognise the true value of Lloyds shares. And therein lies a major caveat as I contemplate buying in. Namely, I must be prepared to stomach more uncertainty over the short term by embracing a longer-term investment horizon.
Nonetheless, if I had any cash to spare I’d eagerly hoover up some discounted shares.
