According to Ryan Paterson, research analyst at Thesis Asset Management, a longer term trend towards rising interest rates could prove beneficial for investors in Lloyds.
Paterson notes that a key metric investors should focus on with Lloyds is its net interest margin, something he believes will improve.
“We think this reached an inflection point and looks brighter from here,” Paterson said. “With further cuts to UK base rates now unlikely and long-term rates beginning to move higher, this should be supportive for the net interest margin.
“In addition to this the planned £7bn MBNA credit card acquisition further enhances the margin potential and looks to be a good use of capital that will boost earnings.”
Despite the UK’s economic outlook remaining uncertain, Paterson believes Lloyds has a brighter outlook than many other constituents of the FTSE 100.
Since the EU referendum on 23rd June, Lloyds’ share price is down 9.81%. In comparison, the FTSE 100 has risen by 13.57% in the same period.* In the immediate aftermath of the vote, Lloyds plunged nearly 25% in the week following.**
“The share price of Lloyds bore the brunt of the UK vote to leave the European Union as the market priced in a material downturn in the economy and deteriorating credit quality,” Paterson said.
“Whilst the UK’s prospects remain challenging and uncertain we viewed the outlook for Lloyds to be less severe than what the market was factoring and decided to increase our exposure to take advantage.”
Paterson sees Lloyds as an attractive stock for investors looking to gain exposure from the financial sector, believing its recent rebuff by the market to be undeserved.
“Lloyds continues to trade at an undeserved price to earnings discount relative to the banking sector and at the same time offer a prospective dividend yield above its peers.”
“We believe the market will begin to recognise these attractive attributes and start upgrading their earnings forecasts which should result in share price appreciation.”
*Source: London Stock Exchange – Lloyds closed at 72.15 on Thursday 23rd June 2016 and at 65.07 on Friday 20th January 2017
FTSE 100 close at 6338.10 on Thursday 23rd June 2016 and at 7198.44 on Friday 20th January 2017
** Source London Stock Exchange – Lloyds closed at 72.15 on Thursday 23rd June 2016 and at 54.06 on Thursday 30th June 2016.