Lloyds Shares Worth 92p, Say Morningstar Analysts

Shares in the bank have almost doubled in the past year but Morningstar analysts believe they're still undervalued

Holly Cook 18 September, 2013 | 10:35AM
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Shares in Lloyds Banking Group (LLOY) have almost doubled in the past year but Morningstar analysts think they still have further to go. Lloyds closed just under 75p on Tuesday but Erin Davis, European banks analyst at Morningstar, now values the stock at 92p a share--a significant increase on her previous 60p-per-share valuation.

The UK government selling down part of its stake in the bank only reinforces Davis’ opinion: "the prospect of government meddling should significantly recede," she says.

Moreover, Lloyds has finished with much of the heavy lifting involved in becoming the attractively profitable bank it once was, says Davis, noting that the group has written down or sold most of its bad assets acquired via its HBOS takeover, as well as its assets in Ireland. "The good results from its core operations will therefore become a much more significant driver of the group's results in the next two years," Davis says.

Davis attributes most of the increase in her fair value estimate to her cost of equity analysis, which she has reduced to 10% from 12% such that it is more representative of the risks facing the retail-focused bank. This factor accounts for 20p of the 32p fair value hike. The remaining 12p increase in valuation is triggered by Davis' higher medium-term forecasts.

"We think near-term net interest margins will remain very low in 2013 and will gradually increase to 1.4% by 2016 compared with 1.1% in 2012," Davis writes in her latest analyst note on the bank.

"We expect Lloyds' equity/assets ratio to increase to 5.25% by 2015, compared with 2.15% in 2009 and 4.76% in 2012, as the bank adjusts to higher capital requirements," she adds. 

Davis is quick to point out the risks involved in investing in Lloyds, however. "I think it's important for investors to remember that Lloyds has about twice as much capital as it did pre-crisis, and therefore returns on equity going forward are almost certain to be lower than they were before the crisis," she warns.

Premium members can read the full Morningstar Analyst Report on Lloyds here. Not a Premium member? Not a problem! Get instant access to Morningstar Research when you take a free 14-day trial

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Lloyds Banking Group PLC55.34 GBX0.38Rating

About Author

Holly Cook

Holly Cook  is Manager, Morningstar EMEA Websites