Just as Lloyds shares were starting to build some momentum on the back of higher interest rates, Liz Truss and her new government stopped the bank’s rally in its tracks.
Recent declines in Lloyds share price were a result of Kwarteng and Truss’s failed attempt to be fiscally radical, and a massive vote of no confidence by the markets.
The pound has been the main barometer of the markets’ views on their fiscal, but underlying gilts yields have sent waves through the UK’s financial system, and damaged the value of FTSE 100 asset managers and banks.
Today, we consider three reasons why Lloyds shares on particular could be a buy after the recent sell off.
Lloyds dividend
The promise of an attractive dividend to compensate for a wait for capital appreciation will almost always secure the interest of income investors.
With a dividend yield of 4.7% and dividend cover of 3.9x, Lloyds shares have both a strong yield and the capability of increasing dividends in the future.
Interest rates are set to rise
Disruption in the mortgage market will likely mean Lloyds sets aside provisions for bad debt in their next trading statement.
However, this is probably now largely priced in and investors may see a welcome uptick in Net Interest Margin (NIM) as a result of higher mortgages rates.
A key profitability metric for UK banks, Lloyds NIM will enjoy favourable upside pressures in the near term. Higher interest rates will also mean the future value of Lloyds loan book is worth more today.
Lloyds Price-to-Book valuation
Banks saw the importance of their earnings as valuation metric diminish during the recovery from the financial crisis.
Ongoing litigation costs and changes to capital requirements meant profits were no longer the most appropriate measure of a bank’s financial health or future prospects.
Instead, the market shifted their attention to the bank’s assets and the potential change in book value of their assets. Thus, for some investors, price-to-book has a become the most scrutinised valuation metric for banks in recent years.
Lloyds now trades at 0.6x book value, largely in the with the sector, but slightly below Lloyds average over the past few years.
There are still risks attached to Lloyds, including uncertainty around the housing market and general health of the UK economy, which has been reflected in the move down from 49p to 42p
Yet, with the Lloyds share price at 42p, and taking consideration the three points above, long term investors may take a cautiously optimistic approach to Lloyds shares, especially those with an appetite for income.