This FTSE 100 stock has taken a hit this year, like many other shares listed on the index. Lloyds (LSE:LLOY) is down 16% over the past six months, and this broadly reflects concerns about the UK economy.
But I’m bullish on Lloyds, and I think it could double in value over the long run. Here’s why!
Valuation
Lloyds is one of the cheapest stocks on the FTSE 100, based on its price-to-earnings (P/E) ratio. In fact, Barclays (4.2) is the only cheaper bank according to that metric.
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The banking giant has a P/E ratio of 5.8, which is less than half of the FTSE 100 average of around 14.4.
Lloyds’ low P/E ratio is partially reflective of its impressive performance last year — net income rose to £15.8bn, a 9% increase — but also concerns about the UK economy in the near term.
However, I think Lloyds is phenomenally cheap compared with most of its peers. In fact, even if the share price doubled, and the P/E with it, Lloyds would still not look expensive against other banks.
| Bank | P/E ratio |
| Lloyds | 5.8 |
| HSBC | 10.1 |
| Standard Chartered | 9.2 |
| NatWest Group | 9.9 |
Outlook
Lloyds is heavily weighted towards the property market. In fact, some 71% of its loans are mortgages. This lack of diversity may explain why Lloyds has a lower P/E ratio than some of its competitors. For example, HSBC is more exposed to higher growth markets in Asia.
However, I like this weighting towards the UK property market. It’s a relatively stable part of the global economy and there’s no signs of it slowing down in the long run. After all, successive governments have failed to address long-running shortages.
Sustained higher interest rates could make a massive difference for banks. In the UK, we’ve had exceptionally low interest rates since 2008. If we were to reach a new norm with rates around 2%, margins would improve dramatically.
Risks
There are obviously concerns about economic downturns around the world right now, and the UK is among nations with negative economic forecasts. Downturns mean bad debt and that’s not good for banks.
Doubling my money! Really?
In a recent update, Credit Suisse, said it expects UK banks to perform well on the back of higher net interest margins and net interest income. Credit Suisse said Lloyds was the pick of the bunch, giving it a target price of 71p — that’s 61% above the current share price.
Lloyds is currently trading for 44p, so doubling my money would require the share price to hit 88p, or a little less if I factor in 2p of dividend per share each year. But I do think it’s entirely possible.
I believe there are three factors that will help here.
First, improving investor sentiment concerning the UK economy and the growth potential of British banks.
Second, evidence of sustained higher margins from higher interest rates. And a movement of pre-tax profits towards £8bn from £6.9bn in 2021. At 88p a share, the Lloyds P/E would be just below 10, which is comparable to its peers.
Third, a successful start for new ventures. Lloyds is entering the rental market by buying 50,000 homes over the next decade. I think this could generate great margins, but I’ll wait and see.
I’d buy Lloyds shares at 44p.
