The previous yr has been one for shareholders in Lloyds (LSE: LLOY). Throughout these 12 months, the Lloyds share price has soared 40%. And even after that rise, the black horse financial institution gives a juicy dividend yield of 4.9%.

However the factor is, regardless of rising by two-fifths, Lloyds shares nonetheless look low-cost on some metrics. Ought to I purchase?

Trying low-cost… in some methods

One strategy can be to have a look at the financial institution’s price-to-earnings (P/E) ratio. At 8, it appears low-cost to me.

However with regards to valuing shares in banks, earnings usually are not essentially the perfect measurement to make use of. One various many traders take a look at (usually alongside the P/E ratio) is price-to-book (P/B) worth.

For Lloyds, that ratio presently stands at round 0.8. A determine lower than one mainly signifies {that a} inventory is promoting for lower than the agency’s belongings are value, which means it’s a potential discount.

Valuing financial institution shares is rarely straightforward

Right here is the factor, although: neither of those measurement instruments is right, particularly from a forward-looking perspective.

Why? Take into consideration what occurs to a financial institution when the financial system contracts. Usually, extra individuals will default on loans. Because the nation’s largest mortgage lender, that may be a danger for Lloyds.

As well as, home costs might fall. So, a financial institution can face a double whammy. Earnings can fall as extra provisions must be made for dangerous loans, whereas the e book worth may fall concurrently as properties are value lower than earlier than.

That’s not an issue particular to Lloyds. It’s one which faces any financial institution. As with its friends, Lloyds might be adversely affected however there’s a restricted quantity it will possibly do to guard itself. In a critical property or banking downturn, few lenders are unaffected.

For the reason that 2008 monetary disaster, Lloyds (alongside different banks) has tightened up its capital base. That provides it a much bigger cushion towards volatility. However eventually, I count on a critical financial setback and picture that can damage Lloyds’ outcomes and likewise its share price.

I’m in no rush to take a position

Till then, I believe the shares may preserve transferring up. In any case, they nonetheless look low-cost immediately on a wide range of valuation metrics. The financial institution is solidly worthwhile, has a big buyer base and powerful manufacturers.

However my concern is that each the UK and world financial system look weak. Issues may get higher from right here, however there isn’t any assure they are going to.

As soon as we appear to be extra comfortably in a sustained upward a part of the financial cycle, I’d take into account shopping for financial institution shares, together with Lloyds, for my portfolio. For now although, I proceed to dislike the dangers concerned. So, though the share price appears low-cost, I don’t count on to be including Lloyds to my portfolio within the foreseeable future.