The stock market volatility of recent weeks means many quality FTSE 100 shares look too cheap to miss.
However, it can be challenging for new investors to separate solid value stocks from bombed-out duds that should be avoided.
The Lloyds Bank (LSE:LLOY) share price, for example, appears to offer excellent value for money on paper. But should investors buy the bank today, or leave it on the shelf?
All-round value
Lloyds is one of the most popular British blue-chips out there. It’s one of the country’s most enduring banking businesses and has a solid record of paying above-average dividends.
At current prices around 47p per share, it trades on a forward price-to-earnings (P/E) ratio of 6.7 times. It also carries another healthy dividend yield of 5.8%.
Persistently-high inflation means the Bank of England (BoE) should continue lifting interest rates, at least in the near term. And this could give retail banks the chance to make better profits by widening the difference on interest rates for borrowers and savers.
NIM uncertainty
But here comes the bad news. I believe the market may be overestimating the size of Lloyds and its peers’ net interest margins (NIMs) looking ahead.
Policymakers at the BoE may be reluctant to keep hiking interest rates if choppiness on financial markets persists. Additionally, the weak domestic economy might pile pressure on policymakers to abandon monetary tightening. They might even excitedly cut interest rates later in the year if inflation falls as expected.
Ratings agency Fitch recently said it expected bank NIMs to peak in the coming months. This would happen “as depositors become more selective in search of higher yields, mortgage margins fall, the slowing economy weighs on credit demand, and the policy rate peaks by mid-year”, it commented.
Rising pressure
Another problem for Lloyds is that pressure is rising for retail banks to provide savers with better rates. Calls have risen sharply from politicians and consumer groups amid evidence showing interest rates rising far more sharply than savers’ rates since late 2021.
Last week the powerful Treasury Committee wrote to the Financial Conduct Authority to investigate “whether banks are earning disproportionate profits by increasing rates on mortgages far quicker than rates on savings products”.
The NIMs reported by the established banks are also under increasing threat as competition in the financial services sector increases.
Challenger and digital banks like Revolut, Monzo and Starling can all afford to offer better rates to savers and borrowers. This is because of their branch-free operating model which means costs are far lower than those of high street banks.
The likes of Lloyds may have to increasingly slash rates they charge borrowers and raise what they offer savers. The alternative is a continued loss of customers to its new-age rivals.
Lloyds may offer attractive value on paper. But on balance, I’d rather go shopping for other FTSE 100 value stocks today.
The post Is this cheap FTSE 100 share a brilliant bargain or a value trap? appeared first on The Motley Fool UK.
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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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