The stock market seems to have a relatively negative standpoint when it comes to the Lloyds Banking Group PLC (LON:LLOY) (LLOY.L) share price. The bank has a P/E ratio of around 8 at the moment. This suggests that investors are concerned about its financial prospects, with Brexit and a weaker UK economy being one potential reason for this.
In my view, though, the stock market may be undervaluing the bank. It is expected to post positive EPS growth in the next two financial years. Beyond this, it seems to have a sound growth plan which could lead to a stronger performance over the medium term.
In the last few years it has been focused on improving its financial strength and operational performance. It has made several thousand roles redundant, while also rationalising its asset base. This has allowed it to focus on its core assets, which could lead to an improved risk to reward ratio over the coming years.
The effect of Lloyds’ strategy on its cost to income ratio has been positive. It now has one of the lowest cost to income ratios in the FTSE 100 banking sector, and this could help it to generate improving performance in a variety of economic conditions. Stress tests have also shown it to perform relatively well versus peers, which could reduce its risk over the long run.
The decision to purchase MBNA could provide the Lloyds share price with a boost over the medium term. I wouldn’t be surprised if it seeks to make further acquisitions, with asset prices in the financial services sector being relatively appealing according to my research.
As a result of this growth potential, plus its improving operational and financial outlook, I think that the stock could be worth more than its single-digit P/E ratio suggests. Therefore, I’m optimistic about its long-term prospects, although volatility has the potential to remain high in the near term.