With Lloyds shares red hot, investors should consider this AIM alternative

As Lloyds (LSE:LLOY) shares edges closer to what many investors would consider fair value, my attention is turning to alternative options in the UK banking sector. One AIM-listed name that stands out is Arbuthnot Banking Group (LSE:ARBB). It’s much smaller, with a markedly different profile, but appears to be an attractive proposition.

And while Lloyds remains a staple for income and stability, Arbuthnot offers a blend of value, growth, and yield. This could appeal to investors seeking something beyond the big high street banks.

Valuation is key

Looking at the numbers, the contrast between the two banks is striking. In 2025, Arbuthnot is forecast to deliver earnings per share (EPS) of 129.6p. At a share price of around 950p, this equates to a price-to-earnings (P/E) ratio of 7.3.

This is a notable discount to Lloyds. The larger bank is expected to post EPS of 6.5p and trades on a forward P/E of 11.8 for the same year.

Moving to 2026, Arbuthnot’s EPS is forecast to rise to 152.2p. This brings the P/E down to just 6.2. Meanwhile, Lloyds’ EPS is expected to reach 9.1p, reducing its P/E to 8.4. By 2027, Arbuthnot’s P/E is projected to fall to 5.5, compared to Lloyds at 7.

Arbuthnot also wins on the dividend yield. The bank’s dividend per share is forecast at 53p in 2025, rising to 57p in 2026 and 61p in 2027. That translates to a yield of 5.6% in 2025, moving up to 6% in 2026 and 6.4% in 2027.

Lloyds, by comparison, is expected to pay out 3.4p per share in 2025, 4p in 2026, and 4.6p in 2027, for yields of 4.5%, 5.4%, and 6%, respectively. While Lloyds’ income is well covered by earnings, Arbuthnot’s payout ratios are similarly conservative. The latter’s dividend cover is expected to remain above 1.9 times through the forecast period.

Moreover, Arbuthnot trades at a price-to-book ratio of just 0.54 in 2024, well below Lloyds at 0.75, and both are below the sector average, suggesting value in the shares.

The bottom line

Arbuthnot‘s revenue is expected to climb from £179.5m in 2024 to £182.6m in 2025, £193.7m in 2026, and £209.7m in 2027. Lloyds, meanwhile, is forecast to grow revenue from £18.4bn in 2024 to £19.4bn in 2025, and £22.1bn by 2027. In other words, I think we’re looking at a similar growth story but just a very different size.

While the absolute numbers are not comparable, Arbuthnot’s growth rate is strong, and it continues to grow its loan book and deposit base at a healthy clip. Recent results show deposits rising 17% year on year, with a stable loan book and a loan-to-deposit ratio of just 57%. By comparison, Lloyds’s is over 90%.

However, Arbuthnot’s size may heighten risks. It operates in a more specialised, relationship-driven niche and the economic outlook is uncertain, with the UK economy dragging and regulatory changes on the horizon.

Nonetheless, this stock certainly interests me. Investors may want to consider this alternative.

The post With Lloyds shares red hot, investors should consider this AIM alternative appeared first on The Motley Fool UK.

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James Fox has positions in Lloyds Banking Group Plc. The Motley Fool UK has recommended Lloyds Banking Group Plc. 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.