Lloyds Banking Group (LSE: LLOY) shares are up 23% so far in 2024. But on fundamentals, they still look cheap to me.
I mean, we’re looking at a forecast price-to-earnings (P/E) ratio of under 10, dropping to seven based on 2026 forecasts. And it’s a stock with an expected 5% dividend yield. That’s a good bit better than the FTSE 100 average on both counts.
And what if bank stocks are set for a strong decade? I see signs that they might be.
The cuts start
It’s all about interest rate cuts, and we’ve already had a small one from the Bank of England, of 25 basis points.
But over in the US, the Federal Reserve has just made a much bigger 50-point cut, even though inflation there, just like in the UK, is not quite down to target yet. And there’s even talk that the Fed’s been too slow to start its cuts.
Meanwhile, Mike Mayo, an analyst with Wells Fargo, has been comparing now with 1995.
The Fed cut interest rates in 1995, while avoiding a recession. And the KBW Nasdaq Bank Index, which tracks the bank sector, climbed 40% that year.
Now, that didn’t happen in other rate-cutting years. This year though, further cuts are pretty much inevitable. And Mr Mayo did say: “History isn’t likely to repeat, but it may rhyme.”
Interest effects
Why should an interest rate cut help the banks? In one way, it shouldn’t. In fact, lower rates mean tighter lending margins, and that should be a hindrance.
But against that, cheaper borrowing can stimulate business and get the economy growing stronger. And that can mean larger borrowing volumes, and a lower risk of bad debt provisions.
There is a risk here in the difference between UK and US banks, and it’s in corporate banking. The UK’s banks, with the exception of Barclays, have stepped away from that. And I don’t really count HSBC Holdings, as that’s far more aligned with the economy of the Chinese zone.
So we maybe shouldn’t expect to see as much of a business boost for Lloyds, at least not in that direction.
Valuations
But anything that boosts the banking industry globally could give a serious knock-on boost to banks in the developed world.
And UK banks are valued below US peers. Wells Fargo, for example, is on a P/E closer to 11, which is not a lot above Lloyds. But analysts only expect a 3% dividend yield.
So, maybe Lloyds, along with our other high street banks, could have further to go to get back to a fair long-term valuation?
Bottom line
Now, all of this is essentially speculation, and the Lloyds share price might not benefit at all from rate cuts. After all, it’s much bigger on mortgages than the rest of the banks.
We really shouldn’t try to time our investments anyway — not with rate cuts, or anything.
Still, with a bit of luck, I hope we Lloyds shareholders might be set to party like it’s 1995.
