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Lloyds Banking Group (LSE:LLOY) shares have soared over 70% since the start of 2025. Today (15 December), they’re changing hands for around 95p and all eyes appear to be focused on whether they can break the 100p barrier. Based on forecast earnings for 2025, they’re now the most expensive of the FTSE 100’s five banks.
But this doesn’t necessarily mean they’re over-priced. Let’s use the helping hand of artificial intelligence (AI) to try and find out.
Quick maths
One of the most common techniques employed to assess a company’s valuation is a discounted cash flow (DCF) forecast. This looks at the future estimated cash generation of a business and then, by applying a discount rate (9% in this case), estimates what a company should be worth in today’s money.
I asked ChatGPT to do the number crunching for me. However, before giving me the answer, the software warned that the cash flows of Lloyds can be “volatile” as its earnings are dependent upon interest rates, capital requirements and loan defaults.
It therefore proposed an approach based on earnings and dividends instead of “pure free cash flow“, which takes into account an estimate of the bank’s future profit (not cash) and returns to shareholders.
So what figure did it come up with?
The final answer
Interestingly, it gave a range of 90p-110p. On this basis, it reckons the bank’s stock price is “not obviously crazy” but not “super cheap” either.
The trouble with calculations like these is that the results are highly sensitive to the assumptions made. For example, changing the discount rate will lead to a different result. However, taking it at face value, I was a little surprised. I’ve long believed that the bank’s being overvalued by investors.
I’ve previously written that its almost total reliance on the UK economy makes me a little nervous. Indeed, last week (12 December), it was revealed – to the surprise of most economists — that GDP contracted in October. A weak economy increases the likelihood of bad loans and reduces the level of potential new business.
Being honest, I don’t think the bank’s earnings are going to grow at a rate implied by its current share price or in line with analysts’ forecasts. And as impressive as AI software can be, I don’t think it’s a substitute for human-based research.
Something else
But as an alternative to Lloyds, I think HSBC‘s (LSE:HSBA) worth considering. Although it’s exposed to the same industry risks – the potential for loan defaults and an economic slowdown — these are spread over a far larger geographical footprint. Hong Kong and the UK remain its two largest markets, but with 41m customers in 57 countries, it’s not totally reliant on one particular jurisdiction.
It also has the financial firepower to cope better than most with an uncertain world. Its balance sheet shows $3.2trn of assets including nearly $1trn of loans.
Also, based on forecast earnings for 2025, it has a lower price-to-earnings ratio (12.7) than Lloyds (14.2). Its dividend is also more generous. On this basis, I think HSBC offers better value than its British rival.
