Lloyds Banking Group PLC

Lloyds Banking Group PLC (LON: LLOY) is listed on FTSE 100 index. It offers a variety of banking and financial services in the United Kingdom and globally.

Investment Rationale for Valuation – Buy at GBX 45.34

• Q1FY22 Performance Highlights: LLOY reported net income of £4.1 billion during the quarter, reflecting an increase of 12% and aided by higher net interest and other income. Underlying net interest income was supported by increased average interest-earning banking assets along with deposit growth in recent quarters.
• Loans and Advances: The Group reported an increase in loans and advances by £3.2 billion to £451.8 billion during Q1FY22, supported by growth in the open mortgage book.
• Uptick in Deposits: Customer deposits grew by £4.8 billion to £481.1 billion during Q1FY22. Loan to deposit ratio stood at 94%, reflecting decent funding and liquidity.
• Technical Indicator: The stock is hovering above the 20-day MA curve, indicating potential for upward movement in the near term.

Key Risks

• Capital Adequacy Risk: The Group’s line of business makes it prone to capital adequacy risks, and it has to maintain sufficient capital as per regulatory requirements.    
• Macro Risk: The current investment scenario has been very volatile in nature owing to geopolitical tensions and inflation concerns. Moreover, the expected rate hike by the Federal Reserve is anticipated to put pressure on the equity and investment markets in the near term.

Financial Highlights (for the quarter ended 31 March 2022, as of 27 April 2022)

(Source: Company Website)

• Tangible Net Assets: The Group reported an increase in tangible net assets per share to 56.5 pence as of 31 March 2022, compared to 52.4 pence reported as of 31 March 2021.
• Net Interest Income: Underlying net interest income improved to £2,945 million in Q1FY22, from £2,677 million reported in Q1FY21.

One Year Share Price Chart

(Source: REFINITIV; Analysis done by Kalkine Group)

Valuation Methodology: Price/Book Value Approach (FY22E)

*Peers: Few peers considered are Bank of Georgia Group PLC, HSBC Holdings PLC and Investec PLC.

*All selected peers are LSE-listed Companies from the Financials sector.

Conclusion

On the back of decent performance in Q1FY22, the Group now expects banking net interest margin to be above 270 basis points in FY22. It anticipates return on tangible equity to be over 11% and risk-weighted assets at the end of 2022 to be £210 billion.  

Based on the resilient fundamentals, strong balance sheet, optimistic outlook, and support from the valuation as done using the above method, we have given a “Buy” recommendation on Lloyds Banking Group PLC at the closing market price of GBX 45.34 (as on 26 May 2022) with lower double-digit upside potential based on 0.78x Price/NTM Book value (approx.) on FY22E book value per share (approx.).

Please note markets are trading in a highly volatile zone currently due to certain macro-economic and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Note 3: Dividend Yield may vary as per the stock price movement.

Note 4: Target Price refers to a price level which the stock is expected to reach as per the relative valuation method and or technical analysis taking into consideration both short-term and long-term scenarios.

Note 5: ‘Kalkine reports are prepared based on the stock prices captured either from the London Stock Exchange (LSE) and or REFINITIV. Typically, both sources (LSE and or REFINITIV) may reflect stock prices with a delay which could be a lag of 15-20 minutes. There can be no assurance that future results or events will be consistent with the information provided in the report. The information is subject to change without any prior notice.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavorable movement in the stock prices.

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