Investors should focus on Lloyds’ net interest margin when judging the firm as research analyst Paterson believes it will continue to improve despite the gloomy forecast for the UK economy and is one of the brighter spots of the FTSE 100.
Thesis has increased its exposure to Lloyds, believing a trend for interest rates to move higher will be supportive for the bank’s net interest margin, and the planned £7bn MBNA credit card acquisition looks set to boost earnings, Paterson said.
This positive outlook for the firm comes despite the fact Lloyds’ share price is down 9.81% since the EU referendum on 23 June last year but the FTSE 100 has risen by 13.5% in the same period.
However, Paterson sees Lloyds as an attractive stock for investors looking to gain exposure from the financial sector, believing its recent rebuff by the market was undeserved.
“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.”
Lloyds continues to trade at an “undeserved price to earnings discount relative to the banking sector” while at the same time offers better prospects in terms of dividend yield.
Paterson concluded: “We believe the market will begin to recognise these attractive attributes and start upgrading their earnings forecasts which should result in share price appreciation.”
Paterson’s forecast comes the day after the UK government confirmed it had recouped more than 90% of the £20.3bn used to bail out Lloyds. The government’s holding in the banking group is now less than 5%.
