It’s been a long time since the Lloyds Banking Group (LSE:LLOY) share price was above 50p. Since the banking crisis of last year, the stock has mostly traded below the 45p mark.
Despite this, the underlying business has been doing fairly well, along with the wider banking sector. So is it just a matter of time until the share price gets back above 50p?
Return on equity
Banks attempt to make money by lending out cash at decent rates. There are a few ways of assessing how well a particular bank is doing this, but one of the best is looking at the return on equity (ROE).
Other things being equal, a higher ROE indicates that a bank is able to use its cash more efficiently. And Lloyds is doing pretty well in this regard – its 11% ROE is around its highest level since 2013.
Lloyds ROE 2013-23
Created at TradingView
Comparing the company to some of its rivals – such as Barclays and NatWest – is also useful. A couple of things stand out.
Lloyds vs. Barclays vs. NatWest ROE
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One is that returns have been increasing across the sector over the last decade. This indicates that the upward trajectory Lloyds is on might be to do with something other than the company itself.
The other is that the Lloyds’s ROE is generally above other UK banks. That’s more significant, since it might indicate the company has something that allows it to outperform its peers on a consistent basis.
Price-to-book
Lloyds is using its equity well, but it’s important as an investor to avoid overpaying for that equity. The share price is down almost 22% over the last year, but there’s more to it than this.
The price-to-book (P/B) ratio compares the level of the company’s equity with its market cap – or the price for the entire business. And a closer look here reveals something interesting.
Lloyds P/B
Created at TradingView
Lloyds shares are currently trading at around 59% of the company’s book value. That’s relatively low compared to the average for the last decade and – again – something similar is true across the sector.
Lloyds vs. Barclays vs. NatWest P/B
Created at TradingView
At the moment, then, banking shares in general – and Lloyds shares in particular – look like terrific bargains. With high ROEs and low P/B ratios, this looks like a great time to be investing in banks.
In general, though, the market doesn’t seem convinced. And there are some good reasons investors should think about seriously before considering an investment.
Interest rates
A key reason for the increasing ROEs recently has been high interest rates. But there’s a danger these are going to come down sooner or later, making recent performance levels unsustainable.
I therefore don’t think investors should think the Lloyds ROE is going to stay at 11% indefinitely. As rates come down, I’m expecting them to normalise a bit.
Importantly, lower interest rates could cause P/B multiples to expand. If that happens, share prices should get a boost.
When Lloyds has traded above 50p before, it’s been the result of lower ROEs and a higher P/B multiple. If interest rates start to come down, I see no reason why this couldn’t happen again.
