Having fallen by 15% in the last year, the Lloyds Banking Group PLC (LON:LLOY) (LLOY.L) share price now has a P/E ratio of under 8. In my view, this suggests that the stock could offer a large margin of safety during what may prove to be a period of high volatility for the UK banking sector.
With the UK economy’s growth prospects having been downgraded in recent months by the IMF, I think that there could be some disruption as the Brexit process unfolds. Since Lloyds generates almost all of its income from the UK, it may be more exposed to the potential challenges that lie ahead than some of its FTSE 100 sector peers.
Although I think there could be some uncertainty ahead due to Brexit, I remain bullish on the prospects for the UK economy over the long run. Even in a no-deal Brexit scenario, I feel that the UK could deliver improving GDP growth and that a number of UK-focused stocks may be undervalued at the moment.
In terms of Lloyds and its strategy, I believe that it is putting in place what appears to be a sound growth outlook. It has been able to improve its balance sheet, and has performed relatively well in stress tests according to my research. Alongside this, cost reductions and a focus on its digital opportunities could make the bank more efficient and help to reduce its cost to income ratio yet further after encouraging progress in this area in the last few years.
With a dividend yield of over 6% and a share price which puts it on a P/E that is among the lowest I can find in the FTSE 100, I believe the company could deliver improving prospects in the long run. Although in the short run it could experience further volatility and even a fall in its stock price, I’m cautiously optimistic about its long-term prospects.