British Banking's Hidden Gem: Lloyds Stands Out As A Sterling Example Available At A Heavy Discount

seekingalpha03-20

Lloyds Banking Group is sterling example of a robust and profitable British retail and commercial bank.The bank has a narrow economic moat thanks to some cost advantages, and a solid reputation in the...

Source Link

Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.

Comments

We need your insight to fill this gap

Leave a comment

{"i18n":{"language":"en_US"},"isChannel":false,"data":{"share":"https://ttm.financial/m/news/2420723691?lang=en_US&edition=fundamental","thumbnail":"https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1955590879/image_1955590879.jpg","is_english":true,"pubTime":"2024-03-20 22:04","share_image_url":"https://static.laohu8.com/5a36db9d73b4222bc376d24ccc48c8a4","id":"2420723691","market":"us","top_or_hot":-1,"title":"British Banking's Hidden Gem: Lloyds Stands Out As A Sterling Example Available At A Heavy Discount","media":"seekingalpha","content":"<div>\n<p>Lloyds Banking Group is sterling example of a robust and profitable British retail and commercial bank.The bank has a narrow economic moat thanks to some cost advantages, and a solid reputation in the...</p>\n\n<a href=\"https://seekingalpha.com/article/4679360-british-banking-hidden-gem-lloyds-stock-stands-out-available-at-heavy-discount\">Source Link</a>\n\n</div>\n","source":"seekingalpha","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>British Banking's Hidden Gem: Lloyds Stands Out As A Sterling Example Available At A Heavy Discount</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nBritish Banking's Hidden Gem: Lloyds Stands Out As A Sterling Example Available At A Heavy Discount\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-03-20 22:04 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4679360-british-banking-hidden-gem-lloyds-stock-stands-out-available-at-heavy-discount><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Lloyds Banking Group is sterling example of a robust and profitable British retail and commercial bank.The bank has a narrow economic moat thanks to some cost advantages, and a solid reputation in the...</p>\n\n<a href=\"https://seekingalpha.com/article/4679360-british-banking-hidden-gem-lloyds-stock-stands-out-available-at-heavy-discount\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"BK1231","symbol_name":"综合性银行","start_time":0,"source_url":"https://seekingalpha.com/article/4679360-british-banking-hidden-gem-lloyds-stock-stands-out-available-at-heavy-discount","article_id":"2420723691","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1955590879/image_1955590879.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2420723691","pubTimestamp":1710943441,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Lloyds Banking Group is sterling example of a robust and profitable British retail and commercial bank.The bank has a narrow economic moat thanks to some cost advantages, and a solid reputation in the","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"BK1231":"综合性银行","BCS":"巴克莱银行","LU0417516738.SGD":"Allianz Hong Kong Equity AT Acc SGD","LU0348735423.USD":"ALLIANZ HONG KONG EQUITY \"A\" (USD) INC","BK1572":"香港银行股","BK7142":"石油与天然气的勘探与生产","BK4588":"碎股","03143":"华夏香港银行股","00005":"汇丰控股","NWG":"NatWest Group","BK4207":"综合性银行","BK1610":"ETF&股票定投概念","BK1601":"香港本地股","BK4112":"金融交易所和数据","LNSTY":"London Stock Exchange Ltd.","LU2236285917.USD":"ALLIANZ GLOBAL INCOME \"AMG\" (USD) INC","LYG":"劳埃德","SAN":"桑坦德银行","HSBA.UK":"汇丰控股有限公司","BK4521":"英国银行股","SAN.AU":"SAGALIO ENERGY LTD","BK4585":"ETF&股票定投概念","HSBC":"汇丰"},"translate_title":"英国银行业隐藏的宝石：劳埃德银行是一个以大幅折扣出售的优秀例子","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"SAN.AU":1,"BCS":1,"SAN":1,"NWG":1,"LYG":1,"LNSTY":1,"00005":0.78,"HSBC":0.6,"HSBA.UK":0.6,"03143":0.6},"content_text":"Lloyds Banking Group is sterling example of a robust and profitable British retail and commercial bank.The bank has a narrow economic moat thanks to some cost advantages, and a solid reputation in the UK banking industry that drives switching costs for clients.Lloyds remained profitable in 2023 with a solid balance sheet amplified by a high return on equity and expanding net interest margin.Shares appear undervalued by 43% in a base-case valuation scenario implying 3% annual income growth.Buy rating issued.Peter Nicholls/Getty Images News Investment Thesis Lloyds Banking Group (NYSE:LYG) is a British banking pure-play opportunity. The bank showed resilience in 2023 despite the U.K.'s market environment being characterized by economic stagnation, sticky inflation and higher interest rates. Current valuations appear to discount the bank heavily with shares trading at a P/B ratio of just 0.78x and a P/E TTM of 7x. My intrinsic value calculation suggests shares are undervalued by 43% in a base-case scenario. I think the bank makes for a lucrative deep-value opportunity thanks to the solid discount in shares and fundamentally profitability being achieved at the bank. I therefore rate LYG stock a Buy at present time. Bank Overview Lloyds Banking Group Investor Relations Homepage Lloyds is one of the largest high-street banks in the U.K operating branches under the Lloyds, Halifax and Bank of Scotland banners. The bank shares the retail market along with four competitors: NatWest group's RBS (NWG), Barclays (BCS), HSBC (HSBC) and Santander (SAN). Their focus on traditional retail and commercial banking has increased the stability of the bank with Lloyds now focusing on conservative mortgage and credit lending instead of more risk averse loans as they did prior to 2008. Charlie Nunn is the current Lloyds Banking Group CEO with William Chalmers occupying the CFO position. Both Nunn and Chalmers each have over 25 years of experience within the financial services sector with Nunn even having worked at rivals HSBC for over five years. While I have not followed their activities closely over the past few years, the last earnings call suggested to me that both Nunn and Chalmers have integral characters and above all, have a clear understanding of how to maintain profitability and stability at the bank. Economic Moat - In Depth Analysis Lloyds enjoys some cost advantages, switching costs and a reasonably solid reputation within the U.K.'s banking industry which I believe earns the firm a narrow economic moat. With essentially no operations outside of the United Kingdom, Lloyds can absolutely be considered as a British banking pure play. With regards to this focus on British domestic banking, it is important to note that the current industry landscape is not particularly stellar. Mordor Intelligence Mordor Intelligence expects the entire domestic retail and commercial banking industry is only expected to grow at a measly CAGR of 1.26%. Reduced rates of foreign investment into the country (as a result of the U.K. leaving the EU) along with a stagnating economy are the primary factors limiting growth within the sector. Combined with this stagnating industry environment, Lloyds continues to battle for customers with the aforementioned four other \"high-street\" competitors. LYG 2023 Results Report While some competitors such as HSBC and RBS have a greater breadth of operations, Lloyds' focus on the retail segment appears to have paid-off with the bank holding the largest monetary volume of retail deposits (around £308bn). A large portion of these deposits (£102bn) are in retail current accounts which incur little to no interest expense for the firm. This relatively large portion of cheap money allows the bank to operate more efficiently and expand their NIM. By attracting retail customers to the bank through current and savings accounts, Lloyds also increases the frequency of cross selling of services to customers such as credit cards, consumer loans and mortgages. These products drive switching costs for consumers as the process of transferring to a new bank would be a strenuous and complex ordeal. It is also important to note that since the 2008 financial crisis, the U.K. has seen a large portion of the general public develop a skeptical and negative image of banks and the banking industry as a whole. I believe that the greater portion of customers gravitating to Lloyds suggests the institution has managed their image better than its peers thanks to the bank being devoted to improving the customer experience and conveying a reliable image. Development of a comprehensive in-house wealth management and private banking service for retail clients could also serve as another opportunity to develop a differentiated position within the market. While the wealth business unit only has around £10bn in deposits at present time, Lloyds is focused on growing this segment significantly which could generate real top and bottom-line growth for the bank. LYG 2023 Results Report The bank has a substantial volume of consumer credit card, motor finance and small business loans. Of the bank's £450bn in loans and advances, approximately £345bn can be classified as retail consumer loans with the remaining £105bn consisting of commercial, corporate and institutional loans. Lloyds commercial banking unit is another important element of the bank's overall operating model with segment contributing over £162bn in deposits to Lloyds bank's balance sheets. Indeed, this massive monetary volume of deposits is critical for the bank considering their retail segment had a loan-to-deposit ratio at the end of 2023 of 112%. The corporate banking unit had a much more manageable loan-to-deposit ratio of 64%. Overall, I believe Lloyds has a solid operating model with their focus on retail and commercial customers tangibly differentiating the bank from their key rivals. A great volume of low-cost funds combined with the ability to attract retail customers away from rivals supports my thesis that Lloyds has a narrow economic moat. Financial Situation Lloyds is fundamentally a profitable bank. In 2023 the bank generated ROA and ROEs of 0.92% and 17.84% respectively. Key industry rival Barclays only managed ROA and ROEs of 0.43% and 11.80% which illustrates just how solid Lloyds' profitability was in 2023. LYG 2023 Results Report February 22, 2024, saw Lloyds report their full-year 2023 results. Underlying net interest income for the bank increased 5% YoY in 2023 thanks to retail lending resilience and the beneficial impact of higher interest rates on variable loan products. NIM for 2023 increased 17bp to 3.11% which is excellent to see. Lloyds' relatively large volume of zero-interest current account deposits helped limit the increase in interest expense which further boosted their NII for 2023. In total, net income grew 3% YoY despite a difficult macro landscape. LYG 2023 Results Report The 5% increase in operating costs to £9.1bn came as no surprise given the firm's significant investment into their wealth management unit, an increase in operating lease depreciation and the impact of severance charges as the bank decreases their headcount by eliminating 1600 jobs. Remediation costs increased a massive 164% YoY as a result of a Financial Conduct Authority ('FCA') review into some of Lloyds motor finance loans. Given the size of Lloyds bank, regulatory examinations and some fines are a normal element of business, and I am not overly concerned about these remediation charges. Total costs increased 10% YoY. The bank's cost to income ratio increased accordingly by 3.6pp to 54.7%. Still, I think this is a pretty decent cost to income ratio and illustrates how efficient the bank continues to be even despite a difficult macro environment in the U.K. LYG 2023 Results Report Underlying profits before impairments fell 10% YoY which is not too surprising given the impacts of an inflationary market environment, the weak British economy and the increased remediation costs. However, a very interesting element of their most recent income statement is the 80% decrease in impairment charges. The significant improvement came primarily from a single client's repayment of a substantial non-performing loan along with overall strengths in underlying asset quality. LYG 2023 Results Report On that note, the bank's equivalent asset quality remained at 29bp which is reasonable along with £4.4bn in total expected credit loss allowances (down 18% YoY) at year end. However, Lloyds has noted that there has been a modest deterioration in their legacy variable rate UK mortgage portfolio which still has some of the riskier loans originated prior to 2008. As a whole the bank noted that new to arrears flows and flows to default remained stable with most deterioration once again occurring in the aforementioned legacy mortgage portfolio. Lloyds remains well capitalized with a CET1 ratio of 14.6%, a liquidity coverage ratio of 142% and a UK leverage ratio of 5.8%. Seeking Alpha | LYG | Profitability Seeking Alpha's quant calculates an \"A\" profitability grade for Lloyds. This rating is in line with my current analysis and evaluation. I would like to highlight the superb net income per employee figure of $111.24K. While the quant only assigns a \"B\" grade, it is critical to recall that this rating is relative to the entire financials sector. When compared against industry rivals Barclays, Lloyds is a whopping 52% more efficient generating over $30k more income per employee. Seeking Alpha | LYG | Dividend Finally, I would like to highlight Lloyds' dividend which the bank pays to investors on a semiannual basis. The 7.51% yield is attractive with the projected FWD annual payout of $0.19 per common share an increase of almost 100% compared to 2023. Still, it is important to recall that Lloyds has historically had a very irregular dividend which the bank has cut back for many years at a time. Therefore, I apply some caution to my expectations of the continuance of this dividend as most economic downturns see the bank reduce it significantly if not eliminate it completely. Valuation Seeking Alpha | LYG | Valuation Seeking Alpha's Quant assigns Lloyds Banking Group with a \"A-\" Valuation grade. I believe this is a pretty accurate representation of the value present in LYG shares at present time. Lloyds currently has a P/E non-GAAP TTM ratio of just 7.07x which is very low indeed and down 26% from the bank's own five-year average. Even from an absolute perspective, a 7x ratio is relatively low and potentially indicative of a value opportunity. The bank's P/B TTM ratio of 0.78x is also very low. This sub-one ratio indicates that the bank's current valuation is so low that the bank is actually being priced at less than its tangible book value. Considering that Lloyds has a mostly solid asset quality, I believe this P/B of less than one is not warranted and therefore indicates that the bank is trading in real deep-value territory. Seeking Alpha | LYG | 5Y Advanced Chart When analyzing a 5Y advanced chart, it is clear to see how poorly LYG stock has performed. The bank's shares have generated negative 22% returns for shareholders over the past five-years while the popular FTSE 100 index (representing the top 100 companies listed on the London Stock Exchange (OTCPK:LNSTY)) has returned almost 8%. Seeking Alpha | LYG | 3M Advanced Chart Interestingly, the last 3M have seen LYG generate very solid returns for shareholders with the bank's stock advancing 5.7% compared to the greater markets 1.4%. This growth has come as speculations about interest rate cuts from the Bank of England have spurred investor confidence in the institution. The Value Corner Next, I will be using The Value Corner's Intrinsic Valuation Calculation so as to develop a more objective and quantitatively based understanding of the present value of LYG stock. Using current share prices of $2.50, an estimated 2024 EPS of $0.35, a realistic \"r\" value of 0.03 (3%) and the current Moody's Seasoned AAA Corporate Bond Yield ratio of 5.03x, I derive a base-case IV of $4.40. This represents a massive 43% undervaluation in shares. When using a more pessimistic CAGR value for r of 0.00 (0%) to reflect a scenario where a recession in the British economy causes LYG to experience zero-growth, shares are still valued at around $2.60 representing a fair valuation at present time. In the short term (3-12 months), I find it difficult to say exactly what may happen to valuations. Uncertainty with regards to interest rates and inflation continues to plague the British economy. This means any negative catalyst including a poor earnings report from Lloyds could place downward pressure on shares especially after the recent rally. In the long-term (2-10 years), I like Lloyds for their profitable yet conservative retail banking operations, a lucrative commercial banking unit and the investment being poured into their wealth management business. Lloyds Banking Group Risk Analysis A cyclical business environment presents some real risks to Lloyds banking group due to their reliance on retail and commercial loans and deposits for income generation. Recessionary macroeconomic conditions would result in consumers and businesses alike having less disposable cash and capacity to save which would hurt the bank's deposits portfolio. Simultaneously, Lloyds could see less demand for loans and credit products which would hurt their NII tangibly. Such a scenario could also present Lloyds with deteriorating asset quality as their massive exposure to the mortgage market may increase the number of non-performing loans in their portfolio as customer struggle to meet repayments. From an ESG perspective, I also see Lloyds facing some real challenges from what has become an unpredictable regulatory environment. The Bank of England and FCA as regulators appear to have struggled to decide on a direction to take post the hasty departure of the United Kingdom from the European Union. This has created significant regulatory uncertainty which may result in Lloyds finding themselves in non-compliance of new regulations. Any penalties or fines placed upon Lloyds could place a financial burden on the bank and reduce the bank's net income. Nevertheless, given that Lloyds essentially operates solely in the British market, I do not believe the bank faces as much risk from regulatory changes as some of its cross border rivals such as HSBC or NatWest. I also believe the overall lack of major environmental, societal or governance concerns would make Lloyds Banking Group an excellent pick for a more ESG conscious investor. Of course, opinions vary and I strongly suggest you to conduct your own ESG, risk and sustainability research before investing in any security if these matters are of concern to you. Summary Lloyds is a bank that has struggled over the past few years as a higher interest rate environment and stagnating U.K. economy have hampered the bank's growth prospects with shares falling over 20% in 2022. However, 2023 has shown that Lloyds remains a fundamentally profitable bank that is doing what I see as a decent job of handling a tough macroeconomic environment. While the bank certainly still harbors some asset risk from the legacy variable rate mortgages originated pre-2008, I believe the portion of these loans relative to their total loan book is negligible. Given that shares are fairly valued in a worst-case scenario and potentially at a 43% discount given a base-case valuation, I believe a real deep-value opportunity is present in LYG stock.  Therefore, I rate Lloyds Banking Group a Buy at present time.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2420723691"}