Well, I wasn’t expecting that. The Lloyds Banking Group (LSE:LLOY) share price closed 4.9% higher 20 February, after the bank released its 2024 results.
At one point, its stock was up 7.6%, having set a new 52-week high of 67.6p.
And yet the bank failed to meet analysts’ expectations on a number of key measures. In these circumstances, I’d normally expect the group’s value to go down. Instead, investors collectively decided that its market-cap should be over £1.15bn higher.
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Lower-than-expected profits
For example, the consensus of analysts was for post-tax earnings of £4.64bn. The bank missed this by £161m (3.5%). Also, at 12.3%, its return on capital employed was 0.3 percentage points lower than forecast.
However, my biggest surprise is that investors appeared to ignore the increase in the amount set aside to cover fines and compensation arising from the Financial Conduct Authority’s (FCA) investigation into the alleged misselling of car finance.
Previously, the bank had estimated that it might have to pay £450m. This has now been increased by a further £700m, to £1.5bn. However, it’s still lower than the £4.2bn (or 6.9p a share) that one analyst reckons it’ll cost.
As events have unfolded, we’ve seen how sensitive the bank’s share price has been to various court judgements, FCA announcements and media reports. With disappointing profits and an increase in the motor finance provision, I was expecting a significant correction in the share price, especially since it’s performed so strongly in recent months.
Egg on my face
But I was wrong. However, on closer inspection, it’s easy to see why investors reacted so positively. Despite the base rate being cut, it managed to record a net interest margin of 2.95%, which was in line with ‘expert’ predictions.
Also, the bank’s increased its dividend. The payout for 2024 will now be 3.17p. This beat market expectations by 2.6%. Even with the post-results jump in the share price, the stock’s yielding 4.8%. Also, it’s announced another £1.7bn of buybacks.
However, I believe future dividends and share buybacks could come under threat if the motor finance provision has to be increased further. When there’s a need to preserve cash, these are easy targets.
But I think the Lloyds share price isn’t the bargain it once was. It has a price-to-book (PTB) ratio of 0.88. On paper, this suggests the stock’s cheap. However, according to McKinsey & Company, the average PTB ratio of 1,500 listed banks is 0.9, the lowest of all sectors.
And its shares now trade on a multiple of 10.5 times its 2024 earnings. With all of the FTSE 100’s banks now reporting their 2024 results, it’s possible to compile a league table of price-to-earnings (P/E) ratios, and Lloyds is at the bottom.
| Bank | P/E ratio |
|---|---|
| NatWest Group | 8.37 |
| Barclays | 8.44 |
| Standard Chartered | 8.97 |
| HSBC | 9.00 |
| Lloyds Banking Group | 10.53 |
I believe this reflects the recent share price rally rather than investors rating the bank more highly than the others. Lloyds is almost totally reliant on the domestic economy, and with the UK struggling to grow, I fear the bank’s future earnings may disappoint investors. Also, I’ve no idea what the final bill might be once the FCA completes its investigation.
For these reasons, I’m not going to invest.
