The Lloyds Banking Group PLC (LON:LLOY) (LLOY.L) share price has risen 3% since the start of the year. While it has been up by a greater amount, it has slipped back in the last week or so in line with other UK share prices.
In my opinion, there could be more disappointment for Lloyds shareholders in the short run. The general election poses a risk to the performance of the UK economy, since the result is by no means a foregone conclusion. Similarly, Brexit is still likely to be a significant risk for the UK economy even if a more stable government with a larger majority is the end result of the election.
Therefore, I think shares with large margins of safety could be worth buying and holding in the coming months. Since Lloyds has a P/E of around 9, I think it is relatively undervalued. That’s particularly so given the changes it has made to its business model that I feel have made it a stronger and more sustainable entity.
For instance, it has been able to reduce costs so as to become more efficient. Lloyds now has one of the lowest cost/income ratios among UK-listed banks, and it is aiming to reduce it yet further over the next couple of years. Additionally, a CET1 ratio which has improved shows it has relatively sound finances – as highlighted in the recent stress tests when compared to other UK-listed banks.
Lloyds also has a growing dividend and a yield of over 4% in the current year. Since CPI inflation is marching higher and is predicted to increase in the short run, I feel dividend shares could become more popular.
So, while Lloyds faces an uncertain 2017, I believe its low valuation and income potential make it a relatively appealing investment. Its progress on efficiencies and its balance sheet also mean its share price could perform relatively well over the medium term in my opinion.