Over the last six months, Lloyds Banking Group (LSE: LLOY) shares have declined by 15%. This is much worse than the wider FTSE 100, which only declined by 1.2% in the same period.
However, if I had the spare cash to do so, I would still buy shares in Lloyds today. I’ll explain why below.
Banking crisis
First, it is important to note the recent banking crisis in the US. The collapse of Silicon Valley Bank in March, followed by a further two banking failures, has put investors on edge.
Further turmoil occurred when UBS was made to buy out its struggling rival, Credit Suisse, by the Swiss government.
This led to a sell-off across the entire banking industry. Therefore, I may experience some unwanted volatility by holding Lloyds shares, due to the uncertainty of the banking sector.
However, I believe this is unjustified with respect to Lloyds shares.
This is because the banking failures have largely been contained within the US, with the UK financial system still looking fairly healthy.
Moreover, Lloyds recently passed its stress tests conducted by the Bank of England. This indicates its ability to withstand tough economic conditions, should they arise.
There are also plenty of other reasons for me to like its shares.
Recent strong performance
Lloyds released its interim results on 26 July. Pre-tax profit increased considerably to £3.9bn, up from £3.1bn a year ago. As interest rates rise, this has led to higher net interest income.
All this sounds like good news, right? However, the market doesn’t seem to agree, with Lloyds shares continuing to fall.
This is mainly due to a £662m impairment charge it has taken out on itself, denting the company’s profit. Higher interest rates make the cost of living less affordable, which inevitably results in people defaulting on their loans and mortgages.
However, this isn’t an actual loss, it’s a reserve to cover the risk of customers not paying their debts. It’s not as bad as it seems either, as some of this may be credited back in the future if the losses don’t materialise. It makes sense for Lloyds to cover for this potential eventuality.
Despite this, pre-tax profit growing by 23% is still impressive.
Dividend
As someone who loves dividends, Lloyds displayed more good news in its interim results. The interim dividend was raised by 15% to 0.92p. This is higher than the rate of inflation. With a yield of 6.1%, its shares also present a great opportunity to generate a second income.
Cheap valuation
Lloyds shares also look very cheap right now, trading with a forward price-to-earnings (P/E) ratio of just 5.8. Given the average P/E ratio for a FTSE All-Share company is 14.4, this is definitely in bargain territory. With its strong performance and dividend, this looks very appealing to me.
Now what?
There might have been a few banking collapses earlier in the year. However, the UK financial system still looks healthy, and Lloyds also passed its recent stress test.
Moreover, the recent interim results show that Lloyds is actually thriving under the high-interest rate environment. There may be some loan and mortgage defaults, but Lloyds has already created a provision for this.
Combined with the dirt-cheap valuation and strong dividend, Lloyds shares are looking very attractive. That is why I would buy its shares if I had the spare cash to do so.
This post was originally published on Motley Fool
