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Since the banking crisis in March, shares of Lloyds Banking Group (LSE:LLOY) have been stuck below 50p. The stock currently trades on a price-to-earnings (P/E) ratio of five and has a dividend yield of close to 6%.
As Warren Buffett says, the stock market is a short-term voting machine and a long-term weighing machine. So should investors try to buy the stock before the end of the year, even if it looks like a bargain?
Interest rates
So far, 2023 has been a fantastic year for Lloyds. The company makes money by receiving interest on its loans, and rising interest rates have allowed it to earn a higher return on its lending operations.
The bank has also had to pay more interest on customer deposits and investors will need to keep an eye on this. But so far, the gap between what Lloyds pays and what it earns has widened.
For 2023, the company is targeting a net interest margin of 3.1%. That's higher than the 2.4% it achieved in 2022 and nearly double 2021's 1.7% margins.
Higher rates have been positive for UK banks overall and investors should keep in mind that what goes up can also come down. But Lloyds has benefited more than its peers for a couple of reasons.
One is that it has the largest market share, around 24%. Another is that, unlike BarclaysIts profits have not been hampered by the slowdown in investment banking activity.
Valuation
It's worth noting that Lloyds trades at a slightly higher price-to-book (P/B) ratio than some of its UK peers. In particular, its ratio of 0.65 is significantly higher than the NatWestwhich trades at 0.54.
Lloyds generates a better return on equity (ROE) of 15% compared to NatWest's 13%. But the analysts of erythrocytes They argue this is not enough to make up for the valuation difference and suggest selling Lloyds shares and buying NatWest.
I doubt this strategy. Apart from a lower ROE, I think there are some good reasons why NatWest shares trade at a multiple than Lloyds.
One is the fact that NatWest is likely to achieve a lower net interest margin this year than Lloyds. After its spread fell below 3% between July and September, the bank withdrew its guidance of a spread of 3.15%.
Another is that NatWest remains significantly owned by the UK government, which is actively looking to offload its stake in 2024. This is an issue Lloyds does not have to deal with.
Should you buy Lloyds shares?
Overall, UK banks seem like a good option to me at the moment. But despite trading at a slightly higher multiple than Barclays or NatWest, Lloyds is the stock that stands out for me.
The company has benefited significantly from higher interest rates in 2023. While this is good for the business, investors will want to be aware of the risk of the UK government introducing a windfall tax here.
Despite the risks, I think the stock is worth it at current prices. That's why I would love to buy it for my wallet as long as the price stays under 50p.
