After a years-long downtrend versus the S&P 500, European financials are finally making a sustained relative comeback. While the rally against U.S. equities is only a handful of months old, the year-to-date return of the iShares MSCI Europe Financials ETF (EUFN) is negative by less than 10 percentage points – outpacing the S&P 500 Trust ETF (SPY) by more than 12%.
The relative chart, shown below, is at fresh highs since early 2022 – around the time when Russia invaded Ukraine. While the value vs growth and small vs large factor themes ebb and flow, the ex-U.S. vs U.S. stock story just continues to gain steam. Can you bank on one major U.K. financial institution for some gains? Let’s check out the story.
Fun Price Action in European Financials
According to Bank of America Global Research, Lloyds Banking Group plc (NYSE:LYG), together with its subsidiaries, provides a wide range of banking activities including personal and corporate lending, life assurance, general insurance, private banking, and investment management. The majority of the group’s assets and profits are located in and earned in the UK. It operates through three segments: Retail; Commercial Banking; and Insurance and Wealth.
The UK-based $37.7 billion market cap banks industry company within the financials sector trades at a low forward operating price-to-earnings ratio of 6.1 and pays a high 4.7% trailing 12-month dividend yield, according to The Wall Street Journal.
Back in July, Lloyds reported non-GAAP earnings per share of £0.037 with net interest income of £6.14 billion – up 13.3% from the same period a year earlier. Along with solid financial results, the management team raised its 2022 guidance. In the semiannual report, asset quality was said to have increased while capital generation was expected to be greater than 200 basis points. BofA sees a slew of upgrades happening as it suggests investors buy such positive headlines as they come about. Key risks, however, are a likely recession next year in Europe along with weaker interest rates.
On valuation, analysts at BofA see earnings having fallen by more than 12% this year but then rising by nearly the same rate in 2023 before EPS growth normalizes in 2024. Dividends per share are seen as rising along with per share profits over the coming quarters. What’s attractive is the company’s price-to-book ratio, which is well under 1 – a sign of value for bank stocks. On a net asset value basis, shares also look cheap.
Lloyds: Earnings, Valuation, Dividend Forecasts
Looking ahead, corporate event data provided by Wall Street Horizon shows a confirmed Q4 2022 earnings date of Wednesday, February 22. The event calendar is light on volatility events aside from the earnings date, though.
Corporate Event Calendar
The Technical Take
LYG appears to be putting in a bottom formation, but there’s still work to be done by the bulls. Notice in the chart below that shares are up big from a low of $1.70 notched in mid-October. While the stock has underperformed the broader European financials space, LYG is probing above the key $2.20 to $2.30 range. To go along with that, the stock’s 200-day moving average has turned flat and might begin to rise in due time as the stock currently trades above that long-term trend indicator.
The stock is currently in a bull flag pattern, but it is also on false breakout watch – I would like to see $2.20 hold with more vigor. There’s support, though, in the $2.0 to $2.10 area as evidenced by a high amount of volume by price in the last year.
LYG: Eyeing a Bearish to Bullish Reversal
The Bottom Line
I like the valuation and earnings recovery story with Lloyds. The technical chart has bullish reversal signatures, too. The current price range is key to watch, but long-term value appears solid in this large-cap bank.