Lloyds (LSE:LLOY) shares are down 20% over the past 12 months. And while past performance isn’t indicative of future performance, what makes me think this British banking stock could jump by at least 20% or more in 2024? Let’s explore.
Let’s start with the data
Every investment decisions should be backed up by data. And therefore data can be a really good place to start. Essentially, this data helps us understand whether a company is undervalued or overvalued.
And there are plenty of metrics to do this. The most popular ones are the price-to-earnings (P/E) ratio and the enterprise value-to-EBITDA ratio.
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Lloyds trades at just 5.75 times forward earnings. That’s less than half the index average, but it’s worth noting that UK banks, and other cyclical stocks, aren’t expensive on this metric.
However, it’s certainly the case that Lloyds isn’t expensive versus its peers. In fact, with the exception of NatWest — which is cheap partially because the UK government plans to sell its share in the bank — Lloyds is the cheapest.
| P/E | |
| NatWest | 5.16 |
| Lloyds | 5.75 |
| HSBC | 6.19 |
| Barclays | 6.78 |
| JP Morgan | 10.84 |
| Goldman Sachs | 11.16 |
Compounding this is the price-to-earnings-to-growth (PEG) ratio. This is an earnings metric adjusted for growth — it’s among the most important for investors hunting growth. Now, Lloyds has a PEG ratio of 0.7. That suggests the stock is undervalued by as much as 30%.
So it’s cheaper than its peers, and it’s the only bank I know in the UK and US with a PEG ratio under one!
Plenty of positives
Interest rates appear to have peaked, and we should see Bank of England rates fall this year. That’s likely to be a huge positive because higher interest rates have raised concerned about defaults.
As such, due to hedging practices, I’d expect to see net interest income stay high this year, while customer default concerns pass. In fact, Lloyds’s gross hedge income is forecast to surpass £5bn in 2025.
However, there’s a new issue in the form of a potential £2bn fine as the Financial Conduct Authority (FCA) investigates practices around motor loan commissions.
Certain types of motor loan commission were banned by the FCA in 2021 over concerns about a conflict of interest between the broker and the borrower. Of course, there’s never a good time to be fined. But if Lloyds does receive a fine, it’s likely to be on the back of a bumper year.
The bottom line
Could Lloyds shares jump at least 20% to 51p, or higher, this year? Well, the data certainly suggests it’s possible. After all the PEG ratio suggests its undervalued by 30% and it trades at a discount to almost all of its peers.
Moreover, I’m confident that should the UK avoid recession, and interest rates start falling — analysts expect the BoE rate to be around 4% this time next year — Lloyds shares will gain some momentum. In other words, we’re just waiting for a catalyst before the stock realises its value and I feel that could come in 2024.
While I’ve had to reduce my positions in many of my holdings in recent weeks (due to a house purchase), I haven’t touched my Lloyds stock. I think this bank has a good year ahead of it.
