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Lloyds Banking Group receives significant attention from investors. It’s a very popular stock with the retail crowd, and the 26% rally over the past six months has been impressive. However, other FTSE banking stocks are performing even better. Here’s one I spotted that’s up 37% in just the last six months.
A strong contender
I’m referring to Paragon Banking Group (LSE:PAG). It’s not exactly tiny but is a small bank compared to Lloyds, based on the difference in market cap. Paragon has a capitalisation of £1.72bn, whereas Lloyds is at £47.2bn. Quite a difference!
Yet Paragon has been performing very well this year, for several reasons. One factor is the area where it makes the most money. It primarily focuses on generating revenue through lending activities, including buy-to-let mortgages and commercial lending. In targeting niche borrowers (such as portfolio landlords), it can obtain business that high street banks like Lloyds often underserve.
Financial results show that this is working. In the latest half-year report, it said that “underlying earnings per share increased 9.6%, supported by strong loan growth and a 25.1% increase in new mortgage lending.”
Another reason for the share price move has been the resilience in the net interest margin. This is a key figure for the bank, and measures the difference between what a bank pays out on savings and charges for loans. The latest results showed it’s currently at 3.13%, virtually unchanged from the 3.14% at the end of 2024. If this metric can continue to remain around this level through to the end of the year, it should further provide investor optimism for substantial full-year profits.
The party might not be over
Some investors will acknowledge the recent performance, but point out that over a one-year time horizon, Lloyds shares are up 31% versus Paragon at 8%. This is true, but in some ways, it suggests to me that Paragon could have further room to grow in the future.
For example, the price-to-earnings ratio for Paragon is much more reasonable. At 8.65, it’s below the fair value of 10 I use. If anything, it’s still undervalued. Yet the same ratio for Lloyds sits at 12.57. I’m not going to say that Lloyds is overvalued on this factor alone, but it goes to show that for investors wanting a bank that could be undervalued, I know which one I’d prefer to consider.
At the same time, there are company-specific risks to be aware of. One concern is that some of the revenue increase from earlier this year was driven by people rushing to beat changes in stamp duty thresholds that came in at the start of April. Therefore, it might not reflect sustainable demand going forward.
Even with this, I believe the outlook for the bank is strong, and so feel investors should consider it for their portfolios.
