Trade idea of the day Is Lloyds undervalued ahead of reporting on Wednesday

What: 

UK banking stocks are once again under the spotlight this week as they report first quarter earnings. The UK banking sector has remained under pressure as international investors have continued to shun British banking stocks thanks, in part to Brexit uncertainties.

Brexit uncertainties are still rife. Although a transition deal has been agreed, without a solution to the Irish border problem, a Brexit deal could still fall apart at the seams. 

However, there is also some good news out there with the BoE suggesting that an interest rate rise could be coming sooner rather than later this year. 

Higher interest rates could help margins at UK banks across the board.

Banking sector results this week are not expected to massively change sentiment towards the sector given that there have not be any notable changes since the last update from management in February. 

However, the sector could look to use this an opportunity to increase confidence in the outlook of the sector.

Lloyds is still regarded by many as being in recovery mode still and it’s price reflects this still. At the end of last week Lloyds was trading at P/E ratio of 8.5, a discount of 23% to the rest of the UK banking sector. 

Highly surprising considering that it is often considered the most profitable of the UK banks. Return on Equity (ROE) a measure of profitability, last year for Lloyds was 15.6% (excluding ppi charges). 

In comparison HSBC achieved ROE of just 5.6%. Lloyds is planning to increase profitability over the coming three years. In the update in February, Lloyds updated on a plan to increase profits by 25% by 2020, with £3 billon digital investment plan, in addition to expanding pensions, lending and insurance divisions of the business.

Finally take in account the strong dividend growth, with returns of 3.6p forecast for 2018 and 3.7p for 2019, returns are looking very attractive for this “recovery” stock. 

So, whilst Wednesday’s results may not throw out there any ground-breaking news, pay close attention to the outlook and future growth plans as Lloyds continues to look under valued at its current price.

How: 

Lloyds is currently trading up at 66p. An encouraging outlook on Wednesday could see the stock pushing through resistance at 67.5p before attacking additional resistance at 68p. 

A move beyond 69.7p could see the doors open to January’s high of 72.1p. On the downside, support can be seen at 64.5p. Whilst a fall below 62p could open the door to 59p.