Image source: Getty Images
Every time I look at the Lloyds Banking Group (LSE: LLOY) share price, I just think it's too low.
The problem is, I've thought that for years. But the market, as stubborn as it is, simply doesn't listen to me. Or am I the one who should listen to the market?
Now that Lloyds shares have rallied in recent months and are hovering around 50p, it's time to ask myself one key question. Is that as far as they're likely to go, at least for now?
Does it look cheap?
On fundamental measures, Lloyds shares still look cheap. There is an expected price-to-earnings (P/E) ratio of nine, which is reduced to six based on forecasts for 2026. And a dividend yield of 5.4%, which could approach 7% in that time. These suggest that the price is too low.
Measures that may be more useful to bank investors also look promising. We're looking at a price-to-book ratio, which gives us an idea of the stock's valuation compared to the underlying assets, of about 0.8.
So Lloyds is worth less than the value of its assets? Is the future of your current business worthless?
In a related measure, the board expects a return on tangible equity of around 13% by 2024. In bank valuation terms, that's strong.
Not all roses
But not everything can be so good, right? Well, no, it's not. A few things count against Lloyds at the moment.
First is the prospect of interest rate cuts. They would affect Lloyds' business, such as mortgage lending and retail banking generally, in different ways. But the net result should be lower credit spreads.
So the expected return on equity is below the 2023 figure. And there is a good chance that in 2025 they will be lower again.
And unlike other banks, Lloyds no longer has any investment banking business to boost its profits. The 2008 banking crisis showed how risky it can be. But at the same time it is potentially lucrative.
Regulation
UK banking regulations are much stricter now. Therefore, the risk of investment banking should be lower. But it could be a reason why Barclayswhich is still important in that business, could become more profitable in the coming years.
Or why HSBC Holdingswith its focus on the China region, it could have greater long-term appeal.
And speaking of regulation, Lloyds is preparing for a possible penalty. £450m has just been set aside following claims of mis-selling car loans from the Financial Conduct Authority (FCA).
Doesn't it seem like there is some kind of banking scandal around every corner? It is not helping sentiment towards the sector.
Share price
I'm not good at short-term predictions, so take this as a guess. But I can really see the Lloyds share price not going above 50p for at least the next few years. Until the economy stabilizes and we can glimpse the long-term prospects.
But that wouldn't matter to me. I would be happy to continue receiving the dividends. And maybe buy some more shares.
