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?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Man putting his card into an ATM machine while his son sits in a stroller beside him.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

More on Investing Articles

Investing Articles

Up 26%, can the BT share price really push higher still?

The BT share price has surged on several catalysts in 2024, but there’s evidence to suggest that the stock could…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

What are the best dividend shares to buy right now?

As shares in B&M European Value Retail have fallen, the dividend yield has reached a 10-year high. Should investors be…

Read more »

Surprised Black girl holding teddy bear toy on Christmas
Investing Articles

My favourite FTSE 100 passive income stock that keeps the Christmas coffers full

The holiday season is expensive and can leave many consumers struggling to make ends meet. Here’s how I use a…

Read more »

Investing Articles

The latest growth forecasts suggest the Glencore share price will hit 555p!

Harvey Jones has been disappointed by the performance of the Glencore share price since he bought the commodity stock last…

Read more »

Dividend Shares

A closer look at the 11% dividend yield forecast for Phoenix Group shares

Phoenix Group shares have one of the highest dividend yields in the FTSE 100 index today. Could this be a…

Read more »

Investing Articles

If I’d put £25,000 into the FTSE 350 at the start of 2024, here’s how much I’d have today!

Many FTSE shares have rebounded this year as interest rates look set to keep heading lower and market appetite for…

Read more »

Investing Articles

Up 40%, but experts forecast the easyJet share price could soon hit 664p! Time to buy?

The easyJet share price has been flying lately and stock analysts are predicting more fun to come. But there's only…

Read more »

Storytelling image of a multiethnic senior couple in love - Elderly married couple dating outdoors, love emotions and feelings
Investing Articles

Worried about tax raids? Here’s how I’m targeting a £44,526 passive income with shares

Investing in a Self-Invested Personal Pension (SIPP) or Individual Savings Account (ISA) can supercharge one's passive income, says Royston Wild.

Read more »