I’m optimistic about the prospects for the banking sector, but I’m more upbeat about the future for Lloyds Banking Group PLC (LON:LLOY) (LLOY.L) than any other UK-listed bank.
I think there is value appeal across the sector, but probably no more so than for Lloyds. It has a P/E of less than 10 and while I can understand why it trades at a discount, I feel it could offer capital gain potential in the long run.
The reason I can understand its low valuation is its UK exposure. Unlike banks such as HSBC and Standard Chartered which have strong positions in a fast-growing Asian economy, Lloyds is focused on the UK. It generates 97% of its business from within the UK, and since Brexit is causing concerns for many investors I can appreciate why the bank has a relatively low valuation.
In my opinion, there could be more uncertainty regarding Brexit in the short run. I feel business and consumer confidence may be hurt by rising inflation, and this could lead to some difficulties for a range of companies and sectors in the UK. This could include Lloyds to my mind.
However, I feel Lloyds has a positive long term outlook. I think a good deal between the UK and EU could be signed, since it is in both their interests to do so. I also feel the bank has a good strategy which has focused on efficiencies and bolstering its financial strength. While not making it immune to economic difficulties, I think this could improve its performance on a relative basis.
I’m also upbeat about Lloyds because of its income prospects. It has a dividend yield of around 6% using 2017’s forecast payments, which is one of the highest yields I can find among large-cap shares.
Therefore, while I think there are a number of banks with bright futures in the sector, Lloyds is my preferred option for the long term at this moment in time.