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| Lloyds Banking Group Shares May Not Be as Cheap as Previously Thought, According to Liberum Report |
According to a recent note from Liberum, shares of Lloyds Banking Group and other UK banks may not be as inexpensive as some investors had thought. The report highlights the impact of the unique interest rate environment over the past decade, during which bank net interest margins (NIMs) were squeezed to below-normal levels due to zero interest rate policies. While the reversal of interest rates has boosted NIMs, this is likely to be a one-off event as competition for deposits increases and the normal relationship between banks and interest rates reverts.
The note also emphasizes the importance of risk management in banking, as banks must embrace credit risk, interest rate risk, and liquidity risk to maximize long-term sustainable returns. The example of Silicon Valley Bank's failure is cited, in which falling deposits led to the bank liquidating most of its bond portfolio, resulting in a capital raise and a deposit flight that triggered a bank run.
The report further notes that European banks face stricter and more wide-reaching regulation than their US counterparts. Additionally, the pricing of risk has been undermined in the current economic climate, leading to excessive and misunderstood risk-taking.
The research concludes that UK bank shares may not be as cheap as investors had previously believed, as banks face significant risks and challenges in the current economic climate. The report provides three simple screens to identify banks' exposure to the macro/rate cycle and highlights the importance of maintaining confidence in the banking system. Despite these challenges, however, the note emphasizes the importance of risk management and embracing various types of risk to achieve long-term sustainable returns.
