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Lloyds Banking Group: Fully Valued

Apr. 06, 2021 11:56 AM ETLloyds Banking Group plc (LYG)BCS, RBSPF16 Comments
Intrinsic Analysis profile picture
Intrinsic Analysis


  • Following the FY20 result, I provide an updated normalized earnings framework for Lloyds.
  • UK banks have performed very well so far in 2021 and investors should be realistic about further upside potential given current valuations.
  • With a solid balance sheet, Lloyds has capacity to increase dividends over time.
  • I downgrade my rating to Neutral on valuation grounds.

Piggy bank with calculator
Photo by agrobacter/iStock via Getty Images


Since my previous note on Lloyds Banking Group PLC (NYSE:LYG) and UK banking peers Barclays (BCS) and NatWest (OTCPK:RBSPF) have performed very well. Table 1 shows the total return

This article was written by

Intrinsic Analysis profile picture
15 years of professional experience in equity markets and investment consulting to institutional clients, including over a decade as an equity research analyst with a leading fund manager.

Analyst’s Disclosure: I am/we are long LYG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

This writing is for informational purposes only. All opinions expressed herein are not investment recommendations, and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisor capacity and is not a registered investment advisor. The author recommends investors consult a qualified investment advisor before making any trade. This article is not an investment research report, but an opinion written at a point in time. The author's opinions expressed herein address only a small cross-section of data related to an investment in securities mentioned. Any analysis presented is based on incomplete information, and is limited in scope and accuracy. The information and data in this article are obtained from sources believed to be reliable, but their accuracy and completeness are not guaranteed. Any and all opinions, estimates, and conclusions are based on the author's best judgment at the time of publication, and are subject to change without notice. Past performance is no guarantee of future returns.

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Comments (16)

Great analysis. Looks fairly valued which is hard to find in this market.
catsaunders financial profile picture
I liked your article but disagree with your theory. I see LYG is selling ~60% book value. I like fundamental analysis vs/ technical
When did this outfit last pay a dividend to the long suffering investors...3 years....5 years....10 years...???
Yet Lloyds have payed out back bonus sums to employees for the years of long gone disasters....right?
Once a great and valued bank....and then there was HBoS
What a dog.
ButscherDoug profile picture
@Lilliana They last paid a dividend in 2019. They had already declared their first divy for 2020 on Feb. 20, and then canceled all on Apr. 01, 2020.
To bad, they had a nice 6% dividend.
Sentinel Brit profile picture
Thanks for a thorough analysis. I have normally valued banks on the basis of their price to book value. Lloyds has sold above 1x book in the past. At present, it is selling at about 60% of book value, which is historically very cheap. By your analysis, the bank will never get close to selling at book value. If this is the case, it makes for a very bad investment, as the return on equity is terrible. In a capitalist society, the bank has to compete for capital so it must increase its return on equity. It could do this by returning the excess capital via share buybacks or dividends. I suspect, capital will be reduced by either or both of these means; both would serve to increase the share price. However, I also think that this would be unlikely to get the share price to the bank's book value. At the end of the day, management is going to have to improve returns. I think the earnings power is above your estimates - it has to be to make the bank attractive to investors. Perhaps its R&D spending will result in higher revenues/profitability.

I first bought shares above $3.00 and have bought on the way down, my last purchase was at $1.50. Before this cycle is over, I suspect the shares will get back above $3.00, and I would not be surprised if they got to $4.00. I expect management to continue to improve productivity, and revenues to increase as the economy recovers. Lloyds has excellent businesses in the UK and should prosper under better conditions. I expect the regulators to back off over time, which should be favorably received by the market and management.
Intrinsic Analysis profile picture
@Sentinel Brit Lots of good points made there. I agree that P:B and P:NTA can be useful metrics for bank valuations. In my next LYG review, I'll aim to provide some analysis on such metrics, and also look into the other interesting issues you raise. The rate of return being generated by UK banks can certainly improve from here, and as you point out, capitalist dynamics imply that the returns 'should' improve. I suspect that this same argument could validly have been made for much of the last decade. But that's not to say that things cannot improve in the future. Thanks for the comment.
Nab.Investments profile picture
@Sentinel Brit I fully agree!
Sentinel Brit profile picture
@Nab.Investments I notice you also own Barclays. So do I!
Fair points on costs. But I imagine the co might hope that 2021 isn't quite a year of normalised earnings, given the country will have been in lockdown for 4-5 months. E.g. hard to think Other Income being down on a subdued 2020 as normalised (historically £1.5bn higher)
Intrinsic Analysis profile picture
@rackc1ty Thanks for the comment. I'd agree that there is potential upside to my numbers for Other Income. If we used 1Q20 as a guide (mostly pre lockdown), then perhaps £5bn pa could be justified, rather than the £4.4bn pa that I adopted. I've allowed for an uplift of £200m pa from the annualised run-rate for 3Q20 and 4Q20, and it is reasonable to say that there could be more to come on top of that. At this stage I'm feeling rather cautious about how well the UK bounces back from covid, so I've been unwilling to fully bake in the potential benefit to earnings.
I have set a sell limit order at $2.75
Chancer profile picture
Glad I bought BCS at US$8.94.

I did want to buy LYG. But so far I am glad that I waited.
catsaunders financial profile picture
@Chancer all the major UK banks are/were on sale. I picked up a bunch of BCS <$5, NWG at <$3, LYG ~$3 (have DCA down to $3). Why not own all the major banks in one basket?
Chancer profile picture
@catsaunders financial:

Because I do not want to put all my eggs in a UK basket. One thing I do like about BCS is they are diversified into the US. But I am less certain about the UK economic recovery.

I also bought BCS because I plan to sell the only big US bank I own when it hits my sell price. Then I plan to remain out of US banks.
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