With a P/E ratio of 6, is the Lloyds share price too cheap to ignore?

When a FTSE 100 bank is on such a low valuation, it’s surely a no-brainer buy — or a big risk. So what about the Lloyds share price?

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The Lloyds Banking Group (LSE: LLOY) share price is down 20% since a 52-week high in February.

Since then, interest rates have climbed. That can help a bank’s lending margins. But it’s not so good when a mortgage squeeze can lead to bad debt losses.

Still, the Bank of England seems to be holding rates for now.

Low valuation

Judging by Lloyds’ very low price-to-earnings (P/E) ratio of just six, it looks like investors are scared of it.

In fact, the whole bank sector seems to be striking fear into hearts, as Lloyds is by no means the lowest. Of the big FTSE 100 banks, both Barclays and NatWest Group have P/Es under five.

The P/E is a fairly crude measure, but these low values do tell us a lot about the way investors feel right now.

To put it bluntly, I think these are the kind of values I’d expect from companies that have a fair chance of going bust.

Less than half

The Lloyds P/E is well under half the FTSE 100‘s long-term average. A valuation squeeze, considering the risks the bank sector faces right now, is no surprise. But this is enough to make the pips squeak.

Markets almost always seem to overreact. When things look good, they push share prices up too high. And in darker days, the sell-off is often overdone.

So what, really, is the risk with Lloyds?

Impairments

Many folk will be spooked by the £881m in impairment charges the bank made in the first nine months of 2023. And there could be a lot more to come.

Still, so far, it’s less than the £1.01bn set aside over the same period in 2022. The difference? Lloyds puts it down to a modest improvement in the bank’s outlook. Yes, that’s right, an improvement!

The thing is, this time last year, we were staring into the abyss of soaring inflation and expected rises in interest rates.

Now, we’ve been through the thick of it, and we’re coming out the other side.

Liquidity

Lloyds’ liquidity position has declined, but only a bit. At Q3 time, total equity was down just 1% from 31 December.

And the bank’s CET1 ratio had dropped by 0.5 percentage points. But it still stood at 14.3%. That looks healthy to me, and it’s well within the liquidity requirements set by the Prudential Regulation Authority.

Lloyds did fine in the 2022-23 Bank of England (BoE) stress tests too. Those tests model a scenario that the BoE describes as “more severe than the 2007-08 global financial crisis,” and “substantially more severe than the current macroeconomic outlook.

Going bust?

Now, I don’t want to downplay the risks the banks face right now.

Broker forecasts show the dividend yield staying strong. But they often don’t reflect the real risks until it’s too late.

So, yes, I can see the Lloyds share price staying weak for some time yet.

But I think it’s cheap, and I can’t ignore it. I might buy some more. If I don’t go for Barclays instead.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan Oscroft has positions in Lloyds Banking Group Plc. The Motley Fool UK has recommended Barclays Plc and Lloyds Banking Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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