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Lloyds (LSE:LLOY) shares have pushed higher and higher this year, reflecting optimism about credit security in the UK and more supportive trends in the form of interest/hedging income.
However, there’s certainly an argument that Lloyds is now trading close to fair value. That doesn’t mean it can’t appreciate further and that the share won’t continue to gain in the long run. But it does suggest that if I want market-beating growth, I should look elsewhere.
So, what’s that somewhere else? Well, one stock that I absolutely believe investors should consider is Arbuthnot Banking Group (LSE:ARBB). Let’s take a closer look.
A little more on Arbuthnot
Arbuthnot is a diversified UK financial services firm spanning private banking, specialist lending, and wealth management.
Unlike Lloyds, which focuses on mass-market retail and commercial banking, Arbuthnot targets affluent clients and SMEs with a relationship-driven model. It also operates niche subsidiaries providing asset-backed and working capital finance.
The group’s loan-to-deposit ratio was 52% as of H1 2025, down from 58% at the end of 2024, reflecting a strategy of holding a conservative portion of deposits as loans while maintaining strong liquidity and selective credit exposure.
Valuation metrics are key
Arbuthnot trades at a steep discount to Lloyds across all major valuation metrics. We can attribute some of this to the size of the banks — Arbuthnot is valued at just £150m, meaning it‘s a fraction of the size of Lloyds.
However, the data is telling. Arbuthnot’s earnings forecast indicates a price-to-earnings (P/E) ratio that falls from 8 times in 2025 to 5.6 times by 2027. This compares favourably with Lloyds at 11.8 times and 7.5 times over the same period.
On a price-to-book basis, Arbuthnot trades at just 0.53 times for 2025, less than half of Lloyds’ 1.18 times, suggesting the market assigns limited value to its lending and wealth operations despite strong profitability.
While it’s not a perfect science, we can also see that the bank had net assets per share of £16.49 at the end of June. Meanwhile, the stock trades for around £9.
Arbuthnot’s dividend yield is also higher than Lloyds throughout the forecasting period, rising from 5.98% in 2025 to 6.82% in 2027. Lloyds offers 4.24% to 5.73%.
In short, Lloyds trades at a premium for scale and stability, but Arbuthnot offers deeper value, higher income potential, and greater leverage to improving credit conditions.
The bottom line
Arbuthnot isn’t without its risks. Its size is clearly perceived as a risk by the market, but investors should also be wary of the considerable spread between the buying and selling price. An investor would need to see some sizeable share price growth to get past the break-even point.
However, for me at least, the data suggests that Arbuthnot could be a strong long-term performer. It’s a good dividend payer and it looks materially undervalued.
