HSBC - British Banking's Hidden Gem: Lloyds Stands Out As A Sterling Example Available At A Heavy Discount

2024-03-20 10:04:01 ET

Summary

• Lloyds Banking Group is sterling example of a robust and profitable British retail and commercial bank.
• The bank has a narrow economic moat thanks to some cost advantages, and a solid reputation in the UK banking industry that drives switching costs for clients.
• Lloyds remained profitable in 2023 with a solid balance sheet amplified by a high return on equity and expanding net interest margin.
• Shares appear undervalued by 43% in a base-case valuation scenario implying 3% annual income growth.
• Buy rating issued.

Investment Thesis

Lloyds Banking Group ( LYG ) is a British banking pure-play opportunity. The bank showed resilience in 2023 despite the U.K.'s market environment being characterized by economic stagnation, sticky inflation and higher interest rates.

Current valuations appear to discount the bank heavily with shares trading at a P/B ratio of just 0.78x and a P/E TTM of 7x. My intrinsic value calculation suggests shares are undervalued by 43% in a base-case scenario.

I think the bank makes for a lucrative deep-value opportunity thanks to the solid discount in shares and fundamentally profitability being achieved at the bank....

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