Is the Lloyds share price STILL too cheap to miss?

Young mixed-race woman looking out of the window with a look of consternation on her face

The Lloyds Banking Group (LSE: LLOY) share price has posted solid gains over the past month. It’s risen by high-single-digit percentages as confidence across the London Stock Exchange has improved.

Yet Lloyds still trades at a mighty discount to levels seen at the start of the year. And this, on paper at least, means it still offers terrific all-round value.

The FTSE 100 bank trades on a forward price-to-earnings (P/E) ratio of 6.6 times. Meanwhile, its 5.6% dividend yield beats those on offer from other Footsie banks including Barclays and NatWest.

Lloyds’ low valuation reflects the threats it faces from Britain’s rapidly slowing economy. But there are also things to celebrate for the Black Horse Bank. So should I buy its shares today?

Margins rising

Lloyds’ recent share price revival reflects growing expectations of sustained interest rate hikes. This helps banks by boosting the margin between what rates they offer to borrowers and to savers.

Interest rate rises in the first half of 2022 drove Lloyds’ net interest margin to 2.77%, from 2.5% a year earlier. This subsequently helped propel net income 12% higher in the period, to £8.5bn.

That rapid improvement in net interest margins has seen Lloyds hike its full-year forecasts too. It is now expected “to be greater than 280 basis points”. There’s also a chance that Lloyds’ margin could be much higher than that figure.

More rate hikes coming

This is because inflation in the United Kingdom continues to soar. And the Bank of England (BoE) will feel the pressure to keep hiking interest rates at breakneck pace.

Latest consumer price inflation (CPI) data this week piled even more pressure on policymakers to maintain aggressive policy. The gauge showed inflation growth hit a new 40-year peak of 10.1% in July. A milder increase of 9.8% had been expected.

The BoE raised rates by 0.5% earlier this month, taking the benchmark to 1.75%. Latest CPI news means that a similar hike is being tipped by many economists when policymakers meet later this month.

In fact, some are tipping more hefty interest rate rises through to the end of the year, at least. Former Monetary Policy Committee member Andrew Sentence has even said rates might hit 4% by the end of the year, more than double current levels.

Big risks

This is good news for Lloyds. But the flip side to soaring inflation is that it’s also putting extreme stress on the UK economy.

Both the OECD and IMF have in recent weeks tipped zero GDP growth for Britain in 2023. This reflects growing inflationary pressures, and forecasts could get even grimmer in light of latest CPI data.

The toiling economy means that the economically-sensitive banks face a tsunami of loan impairments and a sharp revenues reversal. Lloyds set aside £377m in the first half to cover bad loans. And I fear more could be coming down the line that could smack profits.

And this poses a significant threat to the bank’s profits. So while the Lloyds share price is cheap, I believe this is a fair reflection of the elevated risks it still faces. Despite the boost offered by rising interest rates, I’d still rather buy other UK shares today.

The post Is the Lloyds share price STILL too cheap to miss? appeared first on The Motley Fool UK.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays and Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.