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Share on Lloyds Banking Group (LSE:LLOY) has served investors well over the past year. This stock price is up 26% over the past 12 months.
In general, stocks tend to trade at low prices when the market looks elsewhere. But in the case of Lloyds, I think the low price is undeserved.
Income stream
Lloyds has four main income streams – net interest income, fees and commissions, trading, and insurance. The biggest one is net interest income.
This comes from taking deposits (and paying interest on them) and making loans (and receiving interest on them). Mortgages make up the majority of bank loans.
Rising interest rates mean Lloyds is doing well in 2022. The net interest margin – the gap between the interest paid on deposits and the interest earned on loans – has widened.
Even though this will decrease in 2023, I feel like it’s a stock to buy. The business has a strong competitive position and trades at attractive prices.
Business power
Lloyds has proven itself to be resilient in a crowded industry. The bank has maintained a strong market position despite the competition from challengers like Paragon and Monzo.
The ability to attract deposits is important for banks. Access to a low-cost deposit base is one of the things Warren Buffett calls an advantage Bank of America.
I think that something is true Lloyds. The bank has the highest share of retail deposits in the UK and is one of the largest providers of current accounts.
This provides businesses with a low-cost source of funding that they can use to finance their loans. And it is an advantage that other banks can not imitate as easily.
Evaluation
There are common metrics for valuing bank stocks. This involves taking the company’s return on equity and dividing it by the cost of equity to investors – the price-to-book (P/B) ratio.
By this metric, Lloyds shares look like a bargain. With a return on equity of around 11% and a P/B ratio of 0.74, the expected return is around 15%.
The return is very solid. For comparison, Bank of America’s return on equity is 10% and trades at a P/B ratio of 1.12, giving it a return of 9%.
On top of this, there are other ways to grow. Lloyds is trying to expand its credit card base, to increase income from fees.
Stocks to buy
With banking, there is always the risk of default. Mortgages make up around 66% of Lloyds’ loans on the balance sheet, so this cannot be ignored.
I think that the risk of serious damage to the business due to debt default is quite low. The company has significant reserves to cover these possibilities.
It looks to me as a strong business trading at a decent price. I am looking to add stocks to my portfolio in the near future.
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