Why I think Lloyds shares are the best deal for the FTSE 100

Image Source: Getty Images

Lloyds (LSE: Lloy), barclays, hsbc, natwestAnd Standard chartered All recently reported their first quarter earnings.

Overall, the picture painted was of a positive and better outlook in my opinion.

After all, the banking sector has been under immense scrutiny in recent months.

This was largely spurred by high-profile bailouts in the US and Europe. However, it seems to me that the issues currently facing US banks are not causing as much stress in the UK.

What’s more, some British banks such as Lloyd’s maintain strong and healthy levels of capital.

With that in mind, here’s why I’m convinced Lloyds shares have earned their place in FTSE 100Best deals on.

a solid set of financial results

Earlier this month, the group became the latest UK lender to exceed quarterly profit forecasts. This came in the form of an increase in income due to higher interest rates.

The bank posted a first-quarter pre-tax profit of £2.26 billion, up 46% and better than the £1.95 billion average of analyst forecasts.

In addition, net income generated after deposit payments increased by 15% to £4.7 billion.

However, this was not the full picture of good news.

I was a little worried to hear that deposits fell sharply from £2.2bn to £473.1bn. This included a reduction in retail current account balances of £3.5bn.

According to Lloyds, this was partly driven by seasonal customer outflows, including tax payments, higher expenses and a more competitive market. However, each one represents a risk going forward.

Cheap Shares and Healthy Dividend Yield

Despite a strong set of financial results, I think Lloyds shares are undervalued.

For example, the bank’s price-to-earnings (P/E) ratio sits at a modest 6.3. For comparison, HSBC, NatWest and Standard Chartered have P/E ratios of 10.1, 7.3 and 7.9, respectively.

On top of this, Lloyds boasts an attractive dividend yield of 5.1%, which is higher than Barclays, HSBC and Standard Chartered.

The group’s strong capital position should ensure that the dividend is well covered for now. That said, nothing is guaranteed on that front.

A better outlook for Lloyds

Looking ahead, I think Lloyds shares look primed to benefit from the improving economic outlook for UK banks.

Across sectors, the worrying trend of default expectations appears to have worsened materially as loss charges were substantially better than analysts across the board had expected.

Furthermore, the supportive interest rate environment is great news for the group as Lloyd’s focus on traditional banking means it is more exposed to interest rate cycles than others.

This represents a significant risk with Lloyds, but I am reassured by the bank’s ambitious plans to develop its wealth management options across the asset management, general insurance and pensions businesses.

Investment in these sectors is expected to peak in 2023 and as they are less linked to interest rates, I think Lloyds will be able to reduce its exposure to the downside of the interest rate cycle in the long run.

As a result, if I have some spare cash lying around, I’ll happily buy some cheap Lloyds shares for my portfolio. For the reasons above, I think they are probably the best FTSE 100 deal on offer today.

This post Why I Think Lloyds Shares Are the Best Bargain of the FTSE 100 appeared first on The Motley Fool UK.

read more

Matthew Dumigan has no position in any of the stocks mentioned. The Motley Fool UK recommends Barclays plc, Lloyds Banking Group plc and Standard Chartered plc. The views expressed on the companies mentioned in this article are those of the author and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool, we believe that considering a wide variety of insights makes us better investors.

Motley Fool UK 2023

Source