Selling for pennies, are Lloyds shares a bargain?

It has been a wild week for bank shares, especially in the US. While some UK banks have seen their share prices jump, we haven’t seen anything like the swings we witnessed across the pond.

Still, many UK bank stocks are trading at seemingly cheap valuations. Take Lloyds (LSE: LLOY) is an example. Shares have been sold for not pounds per year.

But this is a banking giant. It owns a variety of well-known financial services brands and is the nation’s largest mortgage lender. Last year, despite the drop in post-tax profits, they still earned £5.6 billion. Despite this, the stock is yielding 5% and trading at a price-to-earnings ratio of less than seven.

Are they an offer to add to my portfolio?

Can bargain

In short, I think the answer can so yes. Lloyds shares have an attractive value, considering the P/E ratio. Often banks are assessed by looking at the price to book ratio. At the moment, for Lloyds this ratio is around 0.7. That seems cheap to me.

But why do I think Lloyds shares are just a possible offer and not necessarily a real deal?

Currently, it is still unclear what will happen to the earnings and book value of UK banks in the coming years. Difficult economic periods can cause more borrowers to default on their loans, for example. This could lead to a drop in income at banks such as Lloyds.

Global picture

An additional risk that has emerged in recent weeks is investor confidence. The big run on Silicon Valley Bank in the US has shaken investors. Many are now running slide rules in banks around the world to understand how stable they are.

The risk I see is that banking is too dependent on trust. Even well-capitalized and competent banks could see their value decline if investors lose confidence in the sector.

I see Lloyds as prudently open. Risk management practices have been transformed since the financial crisis. The pro forma common equity tier one capital ratio (measurement of capital buffer) ended last year at 14.1%, exceeding the remaining 12.5% ​​target.

However, if the banking sector begins to experience a serious collapse in investor confidence, that can affect banks even if they have a strong capital buffer. For now, the risk seems to have been averted, but I’m not sure it’s gone. I expect to see more volatility in the banking sector in the coming weeks and months.

I didn’t buy it

That’s why I’m not buying bank stocks at the moment, including Lloyds. Indeed, after selling Lloyds shares last year, I also sold other bank shares in the last few months and they are not in my portfolio at the moment.

If risks recede, Lloyds’ current share price may look like a bargain. The bank has a lot of power and remains a money-making machine. But, for now, I’ll avoid it.