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I'm excited about myself Lloyd's (LSE: LLOY) shares. They have increased by 38.98% over the last year and are still showing a lot of progress. If we add to this a final yield of 4.54%, the total 12-month return is 43.52%.
They are rising again today, boosted by the news that consumer price inflation has fallen to just 1.7%, comfortably below the Bank of England's 2% target. That's good news for Lloyds, which remains the UK's largest mortgage lender and should benefit as interest rates fall. Lower borrowing costs can also reduce debt impairments.
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The downside of falling rates is that they could reduce Lloyds' net interest margins, the difference between what banks pay savers and what they charge borrowers. These fell to 2.98% in the last quarter of 2023, compared to 3.08% in the third quarter.
Margins stabilized at 2.95% in the first quarter of 2024, but the group still expects them to remain above 2.9% throughout the financial year.
The next development of Lloyds' share price depends in part on the UK economy, which stagnated over the summer, and the impact of Labour's autumn budget.
There is another concern, in the form of the financial regulator's investigation into allegations of motor finance mis-selling. The board has set aside £450m to cover the claims, but the final bill is unknown. Either way, I'm not too worried. I will hold my Lloyds shares for years and expect much more dividend income and share price growth in that time.
Since the stock appears to be a decent value with a price-to-earnings ratio of 7.59 and a price-to-book ratio of 0.8, I have been tempted to buy more. but then FTSE 100 rival HSBC Holdings (LSE: HSBA) caught my attention. It has even more impressive figures, as my crude table shows.
| Lloyds Banking Group | HSBC Holdings | |
| Final performance | 4.54% | 7.22% |
| Expected performance | 5.5% | 9.2% |
| Planned dividend coverage | 2x | 1.5x |
| Trailing P/E Ratio | 7.91x | 7.6x |
| Price-to-book value ratio | 0.8 | 0.8 |
| Operating margin forecast | 40.5% | 49.2% |
| Return on capital employed | 14.6% | 14.6% |
HSBC has a residual yield of 7.9%. Its expected return is a 9.2% hit. This is comfortably ahead of Lloyds, although the coverage is lower at 1.5.
Interestingly, both have the same price-to-book ratio of 0.8 and a return on capital employed of 14.6%. Expected operating margins are slightly higher at HSBC, but both stocks do well on this front.
Both offer brilliant dividend yields
What my tables don't show is the possible risk/reward ratio, which is wildly different. Lloyds is a relatively strong, low-risk operation, focused on retail and small business banking services in the UK.
HSBC targets all of China and Asia. However, this does not automatically make it a more lucrative investment. It has been exposed to the slowdown in the Chinese economy. That partly explains why HSBC's share price has risen a meager 2.54% in the last year, a fraction of the growth Lloyds has achieved.
HSBC is torn between West and East, as Western suspicions grow about the world's second-largest economy. As far as risks go, I think this dwarfs the mis-selling of auto finance.
You could buy some HSBC shares for diversification purposes, when you have the cash. But Lloyds will remain my number one bet in the banking sector and one of the favorite stocks in my entire portfolio.
