Lloyds shares (LSE: LLOY) have been underperforming the FTSE 100 index this year, despite the favourable environment of rising interest rates. The bank’s share price is down about 10% year-to-date, while the broader market is up about 15%. Why is this the case, and are there better opportunities in the UK banking sector?
One of the main reasons for Lloyds’ lacklustre performance is the intense competition in the UK retail banking market, which accounts for most of its revenues and profits. Lloyds has been losing market share in mortgages, personal loans, and current accounts to challenger banks and fintech firms, who offer more attractive rates and services to customers. This has put pressure on Lloyds’ net interest margin, which measures the difference between the interest it earns from lending and the interest it pays to depositors.
Another factor that has weighed on Lloyds shares is the uncertainty over the bank’s future strategy and leadership. Lloyds is in the process of finding a new chief executive, after Antonio Horta-Osorio stepped down in April. The bank has also announced plans to expand into wealth management and insurance, but has not provided much detail on how it will achieve this. Investors may be sceptical about Lloyds’ ability to diversify its income streams and grow its earnings in the long term.
Given these challenges, I think there are other UK banking stocks that offer better value and prospects than Lloyds. For example, Barclays (LSE: BARC) has a more balanced business model, with a strong presence in both retail and investment banking. Barclays has been able to benefit from the robust activity in capital markets and M&A, as well as the recovery in consumer spending and borrowing. Barclays also has a more international exposure, which gives it access to faster-growing markets and reduces its reliance on the UK economy.
Another UK banking stock that I like is NatWest Group (LSE: NWG), formerly known as Royal Bank of Scotland. NatWest has been undergoing a major transformation in recent years, shedding non-core assets, cutting costs, and improving its capital position. NatWest has also resumed paying dividends and buying back shares, after passing the Bank of England’s stress tests. NatWest is trading at a lower valuation than Lloyds, despite having a higher return on equity and a lower cost-to-income ratio.
I think Lloyds shares may be cheap, but they are not necessarily a bargain. The bank faces stiff competition and strategic uncertainty, which could limit its growth potential and profitability. I think other UK banking stocks, such as Barclays and NatWest, offer better value and prospects for investors.
