Is now the time for investors to look beyond the big names in banking, such as Lloyds Banking Group (LSE: LLOY), as a host of challenger bank rivals snap at their heels? Let’s take a look.
Brexit blow
The Lloyds share price has been repeatedly tipped (including by me) to stage a share price comeback, but it continues to flounder. It’s fallen another 13.5% in the past three months, as Brexit fears bite and concerns grow that the global economy is slowing, which could drive interest rates back down again.
Lloyds still tempts me as it offers an incredibly attractive forecast yield of 6%, covered 2.2 times by earnings. By 2020, City analysts believe that could hit 6.4%. Lloyds is now the dividend machine of yore.
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Bargain buy
Today, you can buy it at a forward valuation of just 7.5 times earnings, which puts it deep into bargain territory. A price-to-book value of 0.8 only adds to what looks like an incredibly strong buy case for the £40bn FTSE 100-listed high street banking fixture.
Yet still Lloyds stock falls. Stagnating interest rates make it hard to widen net interest margins and boost profitability, while the slowing global economy threatens a rise in bad debts and impairments.
Boris question
A lot depends on whether new PM Boris Johnson can deliver on his promises, as do so many things. A no-deal Brexit, vote of confidence, or new general election would all menace the UK economy and banking sector. Although that might also be a buying opportunity for contrarian long-term investors.
Edward Sheldon says Lloyds also faces competition from the new breed of challenger banks, as do all the high street monoliths, but he can’t resist that dividend either.
Still life in buy-to-let
One of those challengers is Paragon Banking Group (LSE: PAG). Its stock is up 1.5% today after its trading update for the nine months to 30 June showed “strong new business growth and margin improvements,” in the words of CEO Nigel Terrington. He said the group has delivered in line with expectations and “is well placed to deliver our 2019 objectives.”
The Paragon share price is up 62% over three years, despite stagnating lately, and Brexit won’t have helped here. Today it reported a 20% rise in year-to-date lending to £1.9bn, with continued improvements in net interest margins. Total deposits have now topped £6bn.
Value stock
One problem Paragon has faced down is its focus on buy-to-let, which has been hit hard by the Treasury’s tax crackdown on amateur landlords. Fortunately, the business focuses on the professional market rather than the dwindling private investor sector, and its buy-to-let pipeline climbed 3.2% to £733m. The bank cannot see any signs of deterioration or stress in the credit performance of its loan books, although it’s making precautionary preparations, and maintains a tight risk appetite.
Roland Head admires Paragon’s resilience, noting it has survived several boom and bust cycles since launching in 1985. He also likes its dividend potential, with a forecast yield of 4.7%, covered 2.4 times. Paragon stock is valued at a lowly 8.9 times forecast earnings. So Lloyds isn’t the only potential bargain in the banking sector.
