Why Lloyds is my favourite banking stock

I think the Lloyds Banking Group PLC (LON:LLOY) (LLOY.L) share price could perform relatively well

Lloyds Banking Group PLC
Lloyds Banking Group PLC

The Lloyds Banking Group PLC (LON:LLOY) (LLOY.L) share price continues to move higher. In the last month alone, the Lloyds share price has gained 14%. In my opinion, more growth could lie ahead for the bank which is now back in the private sector.

A key reason for this is the potential for improvements in both its revenue and cost base. In terms of its revenue, the decision to pursue acquisitions in the consumer credit space may lead to improved performance in my view. Although the UK economy and, more specifically, the UK consumer face an uncertain outlook due to increasing inflation, I think a loose monetary policy may mean demand for credit remains relatively robust in the long run.

In terms of costs, Lloyds is aiming to improve yet further on its cost to income ratio. It is already one of the lowest I can find among UK-listed banks. However, Lloyds is targeting more improvements in the next few years. It may also seek to improve its capital ratios, although I believe the stress tests showed that it is in a relatively strong position in this area also.

In my opinion, the banking sector presents growth opportunities at a fair price. I feel the valuations across the sector do not reflect the potential which is on offer when growth forecasts are factored in. Against that backdrop, the Lloyds share price could rise relatively quickly compared to its peers in my view because of its low valuation. Lloyds has a P/E of less than 10, which equals a larger margin of safety and the potential for higher capital gains to my mind.

Although its future may be uncertain due to the possible effects of Brexit and the fact it is focused on the UK after its transformation and restructuring, I’m optimistic about the Lloyds share price. I think it could perform well on a relative basis.

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