eyeQ: have Lloyds Bank shares got overexcited?

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Lloyds Banking Group

Trading signal:strategic short-term model
Model value: 47.2p
Fair Value Gap: +9.5% premium to model value
Model relevance: 76% 

Data correct as at 26 March 2024. Please click glossary for explanation of terms.

Lloyds Banking Group (LSE:LLOY) is significantly geared to the UK economy through its exposure to mortgages, unsecured lending and commercial real estate. Indeed, it is the biggest mortgage lender in the UK with an almost 20% share. In other words, it is seen as a good barometer of UK economic health.

In the aftermath of last week’s Bank of England meeting, Lloyds was one of the biggest winners. This reflected confidence that interest rate cuts are firmly on the horizon, inflation will continue to fall, and in turn this will support rising economic activity. This is affirmed by the eyeQ machine. It shows the stock wants to see easier financial conditions i.e. falling government bond yields and inflation, alongside higher growth expectations.

Now, if the Bank of England is about to cut interest rates, that would ordinarily put pressure on the bank’s net interest income. Typically, there is a delay in passing on those rate cuts to borrowers. However, in the case of mortgages it is likely that competition between the banks remains high. This is especially in light of Nationwide’s planned acquisition of Virgin Money UK (LSE:VMUK). With the five-year UK government bond yield now sub-4%, it should ease the burden for those households set to refinance this year. However, this becomes a headwind for a mortgage-exposed bank such as Lloyds.

Just in the last six weeks, Lloyds shares have rallied over 25% and are now back above pre-Covid levels. On both eyeQ’s short-term and long-term models, the stock is about 10% rich to our model value. Macro explanatory power is 76% on the short-term model and only 44% on the long-term model. However, on both models these dislocations are particularly large relative to recent history.

eyeQ’s model value had been moving higher since February but has stalled over the last week. At this juncture, it is time for this economic bellwether to take a breather.

Source: eyeQ. Past performance is not a guide to future performance.

Useful terminology:

Model value

Where our smart machine calculates that any stock market index, singe stock or exchange-traded fund (ETF) should be priced (the fair value) given the overall macroeconomic environment.

Model (macro) relevance

How confident we are in the model value. The higher the number the better! Above 65% means the macro environment is critical, so any valuation signals carry strong weight. Below 65%, we deem that something other than macro is driving the price.

Fair Value Gap (FVG)

The difference between our model value (fair value) and where the price currently is. A positive Fair Value Gap means the security is above the model value, which we refer to as “rich”. A negative FVG means that it's cheap. The bigger the FVG, the bigger the dislocation and therefore a better entry level for trades.

Long Term model

This model looks at share prices over the last 12 months, captures the company’s relationship with growth, inflation, currency shifts, central bank policy etc and calculates our key results - model value, model relevance, Fair Value Gap.