Is Lloyds (LLOY) the next Goldman sachs?

10th Dec '19 by Magicmerve

11 comments 1846 reads

I find myself unable to sleep at 12:30am because I can not stop thinking about Lloyds shares. Back in 2008 I took a punt on Lloyds shares, £10k, as I worked for them and liked what I was seeing in terms of practice and general management . I sold and bought back in at several intervals, and on the whole mate a tasty little profit. Since my last sell a few years ago I have not had anything to do with this share, but find myself pondering a big question......are Lloyds the next Goldman Sachs after the 2008 crisis?

Ok we seem to have been on an up and down journey since the financial crisis of 2008 and Brexit clearly is muddying the waters right now, but I find myself thinking like my idol Warren Buffett and looking at this point in time as an opportunity to buy some unfavourable stocks that appear to have more puff that the market is valuing them at.

The big question...........are Lloyds being undervalued by the market enough to start thinking seriously about them. Based on Warren's intrinsic value definition I personally value the stock at round 100p, give or take 10%, based on the past 5 years and the next 2. Ok everyone will come up with their own valuation, but they have made some great progress from the days of the HBOS takeover and were the first to commit to paying back all the PPI they mis sold. I'm not gong to go into the financials of the business as we can all see them and make our own decisions on them, but my gut instinct is the same as Warren's when he bought Goldman Sachs and that hasn't worked out to bad has it.

Anyway I'd love to hear everyone's thoughts as right now I feel there is still to much uncertainty around Brexit and how the country will progress in the next year.............but my gut, and even my head, is saying pay attention to this one.

Thanks

Murray

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jwebster

10th Dec '19

Lloyds Banking (LON:LLOY)

Positives - cheap, high dividend covered by good cash generation. Revenues are fairly sticky with customer inertia against switching banks. Very cheap deposit funding - actually zero interest paid on most current accounts and nearly zero interest on savings accounts. Potential for surplus capital windfall once PPI finished and thus share buybacks. Possible a market friendly election outcome gives LLOY a bounce. Buying the MBNA card book was a good idea. The vast customer database LLOY holds is a great opportunity for cross sell.

Negatives - where's the growth going to come from? There is zero product innovation at LLOY, they are a big bureaucracy, terrible IT systems, bricks and mortal branch costs. Yes, they can grow with the economy in general, but that's it.

The risk is eventually a well-capitalised digital bank finally takes on the high street banks. To date this hasn't happened in a seismic way, as HSBC, LLOY, BARC, RBS have a moat around them, namely their branches (for the older generation perhaps) but particularly their ability to get away with paying near zero interest on deposits thus driving down the spread and giving them the ability to offer prime customer vey cheap mortgages and loans. Hard to break into as this forms a tight price barrier to entry.

LLOY should be going gangbusters, simply due to their massive live customer database and cross selling. But they act more like a government department. If there was a dramatic change of management, then perhaps that would be the catalyst.

A bank stock I do buy is JP Morgan with a ROE of 14% versus LLOY at 8%

Magicmerve

Thank you for your comments, a very interesting read that has provided even more food for thought.

john2

My two comments on this are -

1) Assuming that a Conservative government is elected and a reasonably soft Brexit is agreed, there seems to be general agreement that the housing market and therefore the demand for mortgages will take off.

2) I currently hold Lloyds and am happy to do so while they pay a 5.25% dividend. The likelihood of a large decline in the share price from current levels seems pretty low.

How do you feel the share would perform with a hard Brexit?

Not as well. The speculation is that Europeans would be less likely to buy UK property after a hard Brexit ,

shaldon1

16th Dec '19

Just sold my holding of 120k. I cannot see any growth in medium term.There are much better FTSE100 opportunities. Stockopedia ranking says it all for me.

mattbird55

19th Dec '19

Regards Jwebster's comment re JP Morgan's ROE of 14%:- Lloyds is forecast as 13.4% next year. Hopefully this will be attainable with no further PPI provisions etc. Arguably the US banks look a bit more attractive but they aren't trading at single digit earnings multiples.

Rhys Auty

13th Feb '20

One thing everyone is overlooking is their market leading Cost to Income ratio of around 47%. Lloyd's have just partnered with Microsoft and there internal deliverance to customers is about to get even more efficient and agile throughout 2020 maybe even heading towards the realms of 40% Cost to Income Ratio while their competitors still sit above 60%. Combine that with their move into the Financial Wealth market with the Partnership with Schroders which will deliver a further income stream and yes I fully agree with you that they are undervalued. I think Brexit is already heavily discounted in so more upside with a softer Brexit. So I can only see them heading in one direction and that is up North. An excellent Income stock and nice growth potential as well. Is this sleeping giant about to ignite? I think so. I am predicting circa 60p after results and 75p+ by the time we head into 2022. Alongside an increasing dividend whats not to like. Well at the current price anyway !!!

mickoh

25th Sep '20

given the last six months and the current price does this post from last year make more sense or less?

Alphaflight

26th Sep '20

It makes less sense to me. Warren Buffett has been reducing his exposure to airlines and of course the banking sector. He has even ventured into the gold mining space via his Barrick purchase. The banks stocks are priced below book because there is a mountain of dodgy debtors out there and of course they don't pay dividends anymore either. Some of these banks may end up being partially nationalised a la RBS back in circa 2008.

James B1

I'm not sure about 100p seeing at 2015 high was only 88p, I've had a small punt of 2,000 shares at 25p in a 20k portfolio if I were richer I'd probably get a few more. Did a similar bet on BP at £2.45, 500 of those...

Is Lloyds (LLOY) the next Goldman sachs?

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Magicmerve

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