Why Lloyds shares are a smart buy for bargain hunters

On the back of an aggressive rate hike cycle in 2022, Lloyds (LSE:LLOY) shares have jumped 35% from October lows. In fact, the bank’s stock is up 15% this year. Despite this, the stock still remains cheap, so it may still be worth buying.

An interesting development

Lloyds reported full results last year. Unfortunately, the numbers are not impressive. Net interest income (NII) saw a healthy improvement due to higher interest rates. This is the result of the company’s interest-bearing assets yielding higher income than they are owed. However, this is offset by higher impairment charges (bad debt). As a result, Lloyds shares’ trajectory towards 60p has lost some ground as net profit fell from a year earlier.

The outlook shown by Lloyds is also not good. Compared to other UK peers like Barclays and NatWest, Black Horse Bank disappointed with the guidance. This is a substandard net interest margin (NIM) forecast for 2023, with interest rates expected to peak sharply.

However, the lower NIM estimate is also exacerbated by several other factors. The bottom line is that Lloyds must share a larger share of NII with its customers, or risk undermining its strong liquidity. In addition, loan growth may slow due to a tougher macroeconomic environment. This has not been helped by the slumping housing market, as Britain’s biggest mortgage lenders expect to see smaller loan income from lower house prices.

marginal improvement?

Having said that, there are a number of catalysts that could help boost the Lloyds share price upwards. The first is a steady decline in disability. Second, JP Morgan now the forecast for the UK is so narrow that recession. This can boost the lender’s bottom line from credit release in 2023. And if house prices do not come crashing down, Lloyds will be poised to benefit from any value in the housing market in the medium term.

All of the following will not only result in a higher share price for Lloyds, but also a higher dividend. This is because the group’s CET1 ratio (which compares the bank’s capital to its assets) is currently at 14.1%. This is better than the target of 12.5%. Lloyds therefore plans to return that excess capital to shareholders through share buybacks and dividends, starting with a £2bn buyback. As such, analysts are projecting dividend increases over the next three years.

Does Lloyds share a bargain?

So, are Lloyds shares worth buying on that basis? Well, there are a few things I suggest. For one, a strong balance sheet and liquidity insulates it FTSE 100 stalwart of any economic downturns. In addition, the conglomerate is guiding real return on equity (ROTE) as well as real net assets per share over the coming years.

Even better, Lloyds shares are trading at relatively low current and future valuations. So it’s no surprise to see various investment banks, such as Barclays, UBSand German rated the stock ‘buy’, with an average price target of 70p. This gives a rise of 37% from the current level. For that reason, I would like to increase my current stake in Lloyds.