Lloyds Banking Group (LYG) is one of the largest financial services firms in Britain with its operations covering both interest and non-interest-bearing activities. I am bullish on the stock.
Market Outlook for British Banks
JPMorgan’s equity research team cited the Russia-Ukraine situation as a significant obstacle for British Banks but also stated that the “risk-to-reward balance on European banks is positive following the recent share price resets.”
I believe that the market has overdone itself with its bearish reaction to Putin’s invasion of Ukraine, and that banks in Britain are well aligned to prosper.
My central argument is that inflation in Britain is running hot and will be even more fierce with rising energy costs. The signs are that the Bank of England is fast to raise rates when it comes to inflation, providing support to the banking sector.
Banking stocks hold a close correlation with interest rates as rising interest rates provide support to credit spreads, in turn assisting banks with excess profits. I see Lloyds as one of the primary beneficiaries in the region due to its solid market position.
Earnings Report
Lloyds produced stellar financial results during its full year of 2021, with total income coming in at £37.44 billion (+28% year-over-year) and net income at £15.8 billion (+9% year-over-year).
The group’s net interest income grew by 4% during the year, and it’s likely that the segment will experience further growth this year amid a rising interest rate environment.
The firm’s non-interest-based segment unsurprisingly experienced staggering growth, producing £5.1 billion in 2021, with £2.1 billion in Q4 alone.
Following Lloyds’ earnings beat, its CEO Charlie Nunn said that “the bank will focus on catering to “mass affluent” customers, expand digital services for small business clients, and grow selectively in its corporate business. Lloyds will invest 4 billion pounds over five years on these goals.”
Lloyds’ full-year outlook for 2022 is positive with expectations being that it will run at a net interest margin of 260 basis points and operating costs of £8.8 billion versus £8.3 billion in 2021.
Furthermore, the bank’s management anticipates a return of tangible equity of 10% with asset quality of 20 basis points, suggesting that it will continue emphasizing its already attractive capital to risk profile.
Share Buyback
The British retail bank has decided to embark on a £2-billion share buyback program, which is assumed to be completed by the end of 2022.
Share buybacks are often a catalyst for stock price appreciation as they theoretically increase a stock’s intrinsic value, thus creating an arbitrage opportunity for investors.
Valuation Metrics & Momentum
Lloyds stock has value in abundance, with its P/E ratio trading at a five-year discount worth 61.5%, suggesting that the market hasn’t priced in the firm’s earnings just yet.
The stock is also trading at a 40% discount to its tangible book value. Banking stocks are generally mainly valued relative to their book value because their business models are almost exclusively built on the trading of liquid assets.
Investor Sentiment
TipRanks’ Stock Investors tool shows that investors currently have a Very Positive stance on Lloyds, as 3.1% of investors on TipRanks increased their exposure to the stock over the past 30 days.
Concluding Thoughts
Lloyds stock is primed for growth as its robust financial performance has led to a share repurchase program, which could in turn bolster its stock price. The bank’s stock is trading above its tangible book value, suggesting that we’re looking at a prime investment opportunity.
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