Lloyds: Battening Down the Hatches in Weak Q4, But Cheap Even if Targets are Missed
Company Update (LLOY LN) (Buy): Q4 was worse than it looks and mgmt. actions show pessimism, but stock is at 0.9x TNAV and Dividend Yield is 6.1%.
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Highlights
Lloyds trades at 0.9x TNAV and has a 6.1% Dividend Yield
Mgmt. ROTE target of >15% in 2026 implies a cheap 6x P/E
Core franchise is stable, and the structural hedge is helping
But “real” earnings fell in Q4; mgmt. actions may reflect pessimism
At 45.5p, we see a 67% upside (21.2% p.a.). Buy
Introduction
Lloyds Banking Group released 2023 results on Thursday (February 22); shares finished the day up 6.2%, but fell back 1.0% on Friday, and remain down 11.9% over the past year:
Lloyds Share Price (Last 1 Year)
Source: Google Finance (23-Feb-24).
We published our first Substack article on Lloyds with a Buy rating in May 2023. After falling initially and troughing at 39.42p in late October, the share price is now roughly back to where it was last May, giving a small gain of 1.4% (after dividends).
We are reiterating our Buy rating on Lloyds. The key question is how much it will achieve its 2026 Return on Tangible Equity (“ROTE”) target of “>15%”, which would imply an extremely attractive P/E of 6.0x at its current valuation of 0.9x Tangible Net Asset Value (“TNAV”). We have assumed Lloyds will fall short, and 2023 results have added to our scepticism, but the stock is cheap anyway, with a dividend that imply a Dividend Yield of 6.0% now and should grow.
Reported ROTE was actually 15.8% for 2023 and 13.9% for Q4. However, Lloyds was over-earning in 2023 after rate hikes. Excluding negative one-offs, Q4 Profit Before Impairments was down 12% sequentially and the lowest since Q1 2022. Q4 also benefited from some fortuitous credit reserve releases, without which ROTE was likely in single-digits.