Should I buy Lloyds shares for my portfolio?

Interest rates are rising. When interest rates go up, this can be good for bank stocks. I currently own shares of Citigroup (NYSE:C) in my portfolio. I’ve been thinking about adding shares in Lloyds Banking Group (LSE:LLOY) to capitalise on rising interest rates in the UK. With this in mind, I’ve been looking at how Lloyds and Citigroup compare as investments to see whether or not I should consider buying Lloyds shares.

Net interest margin

Net interest margin is the difference between the interest rate that a bank receives on its loans and the rate it pays on its deposits. I view this as one of the most important metrics when it comes to analysing bank stocks. A net interest margin above 2% is a good sign. Both Lloyds and Citigroup have net interest margins around 2.5%. Furthermore, both Lloyds and Citigroup have consistently maintained net interest margins in excess of 2% over the past few years. I think that both score equally well in this regard.

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The book value of a company is the result of subtracting the company’s liabilities from its assets. When I analyse bank stocks, I like to look at how the book value of the company compares to the share price.  Shares in both Lloyds and Citigroup currently trade below their book value. At the time of writing, Lloyds shares trade at 73% of their book value, while Citigroup’s shares trade at 74% of their book value.

Geographic diversification

One difference between Lloyds and Citigroup is that the former is primarily concentrated in one area, where the other is more diversified geographically. With Lloyds, around 95% of the company’s asset base is located in the UK. Citigroup, on the other hand, has much more diverse geographic operations. This leaves Lloyds disproportionately exposed to the UK economy, which may or may not prove to be a good thing. Personally, I prefer Citigroup’s broader geographic footprint.

Loan risk

I think that one of the most significant sources of risk with bank stocks is the possibility of customers defaulting on loans, especially mortgages. When interest rates are rising, this risk is especially prevalent. In this regard, I think that Lloyds is quite attractive. The average Lloyds mortgage is only worth 63% of the asset that it is secured against. I think that this is encouraging. With Citigroup, their current restructuring makes this more difficult to assess. 

Overall, I think that Lloyds and Citigroup are similar propositions. Both are banks that I think are likely to be fairly steady low-risk investments. Where Citigroup has better diversification, Lloyds has a more visible protection against the threat of loan defaults. I think that there might be a place for both in my portfolio and so I’m planning on watching carefully for an opportunity to buy Lloyds shares.

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Stephen Wright owns shares of Citigroup. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

This post was originally published on Motley Fool

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