Lloyds shares were sent sharply lower in the recent banking crisis as FTSE 100 banks sank on concerns we could be entering a financial crisis reminiscent of 2008.
These fears were quashed this week by the Bank of England Governor as he dismissed the current saga being anywhere near as severe as the 2008’s crisis.
This sparked a wave of optimism through markets and banking stocks globally have rallied from their worst levels.
“With banking worries put on the back burner for now, with no further stresses in the system emerging, investors’ appetite for a bit more risk is returning,” said Susannah Streeter, head of money and markets, Hargreaves Lansdown, earlier this week.
The risk investors are prepared to take on is being channelled into US and European banks. The broad global banking sector is now significantly off the worst levels. The S&P Global 1200 Financials Sector Index is around 4% higher than last week’s low.
Lloyds shares
The collapse of SVB which spilled over into Europe and culminated in the takeover of Credit Suisse by UBS send waves through global banking shares. Many now trade at large discounts to recent highs.
This includes Lloyds shares which are over 10% below 2023 highs. This in itself is by no means a buying signal but for long term holders, the current Lloyds share price provides a more attractive entry point than it did just a month ago.
Lloyds now trades at just 6x earnings, lower than Natwest’s 6.5x earnings but higher than Barclays 3.5x. Banking earnings multiples have persistently been below the FTSE 100 average for many years now so comparisons against the FTSE 100 benchmark are of little use.
After a period of rising interest rates, the bank themselves said they see their net interest margins plateauing in the coming year. This would suggest capital appreciation will be a result of multiple expansion, as opposed to earnings growth, in 2023.
Lloyds dividend
One reason why investors may be attracted to Lloyds shares is the dividend. And the income case is compelling.
Lloyds currently yields 5.1% – among the FTSE 100’s top 20 yielding stocks based on historical payouts. Their dividend is covered 3.3x meaning there is plenty of scope for dividend hikes in the future.
In their recent annual report, Lloyds said: “The Board remains committed to future capital returns. Going forward, the Board intends to maintain its progressive and sustainable ordinary dividend policy alongside further returns of surplus capital at the end of the year as appropriate.”
Risks
Although Lloyds shares offer relative value and a progressive dividend, there are of course risks to consider. The banking crisis is not yet completely offer. A rout in Deutsche Bank shares due to a single bet on their Credit Default Swaps last week highlights nervousness around European banks.
In addition, the health of the UK economy – the UK property market in particular – could impact Lloyds share price in the coming months.