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Is Lloyds Banking Group plc (LYG) Among the Best Bank Penny Stocks to Buy According to Hedge Funds?
2024 was another strong year for US banking giants. According to a report by the Financial Times, the four biggest banks in the country are on course to grab their largest share of the industry since 2015. As of September 2024, they collectively reported around $88 billion in profits during the first nine months of the year, representing 44% of the American banking industry’s profits.
In further encouraging signs for the industry, Moody’s in December upgraded the global banking industry from negative to stable for the first time since 2023. It cited monetary adjustments and interest rate cuts among G-20 countries as reasons behind the upgrade. The credit rating agency expects these measures to improve asset quality and liquidity in the banking system.
The Federal Reserve on December 18 announced a further quarter-point cut, reducing the central bank’s target interest rate to between 4.25% and 4.5%. This was the third cut for the year. The Feds also projected two more cuts for 2025. While higher interest rates generally allow banks to earn more, they can dry up the demand for more loans when they remain high for too long.
Moreover, Donald Trump’s victory in the presidential elections has also raised hopes of lax regulations in the financial sector amid growing concerns about antitrust scrutiny and capital requirements slowing down investment banking and lending revenues. Financial analyst Mike Mayo believes Trump’s win will be a ‘regulatory game changer’ with reduced oversight and a freer market, benefiting banks by driving revenues and loan growth. A more business-friendly environment is also likely to boost banks’ bottom line.
However, some analysts also warn of the risks of ongoing geopolitical conflicts in Europe and the Middle East, which are resulting in uncertainty around the outlook of the global economy. Val Srinivas, Senior Research Leader at Deloitte, made the following remarks in the firm’s annual banking outlook positions for 2025:
"Bank executives will welcome 2025 with mixed emotions. While inflationary pressures have subsided and interest rates are dropping, subpar economic growth and continuing geopolitical shocks will likely give bank CEOs anxiety."
Increasing trade tensions between the United States and China, with growing protectionist policies can also hurt investment flows in 2025. Following his election victory, Trump has vowed to impose steep tariffs on imports from Canada, China, and Mexico, which could increase costs for manufacturers.
Last month, in a post on his Truth Social platform, the President-elect threatened the European Union (EU) with tariffs if it does not buy more oil and gas from the US. The spokesperson for the 27-nation bloc, which already relies on Washington for most of its energy needs, stated that the EU was open to negotiations.
Methodology
We sifted through screeners to identify stocks in the banking sector that had a share price of under $5 as of the close of day on Friday, January 3, 2025. From there, we selected the 10 stocks with the highest number of hedge fund investors, based on Insider Monkey’s database of over 900 prominent hedge funds as of Q3 2024.
The 10 best bank penny stocks have been ranked in ascending order based on the number of hedge funds holding stakes in them. Where two or more stocks were tied on hedge fund sentiment, we used a higher market cap as a tiebreaker between them.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
An aerial shot of a business district with the company's headquarters towering above its competitors.
Lloyds Banking Group plc (NYSE:LYG) is a UK-based financial services company that provides a range of banking and financial services within the country and internationally. It is one of the best bank penny stocks to buy according to hedge funds.
The company has been looking for ways to make the banking experience more flexible for its customers. On January 9, it announced that it would let customers do in-person banking at any of its three brands – Halifax, Bank of Scotland, and Lloyds – irrespective of which bank they had accounts with.
This was a move many saw coming, especially after Lloyds Banking Group plc (NYSE:LYG) introduced standardized uniforms for staff across the three banks last year. According to a report in The Guardian, some staff already move between different brands for work. The shake-up, however, has sparked concerns among unions who fear closures and job cuts ahead, because about 25% of these banks’ branches are located within proximity of one another.
Lloyds Banking Group plc (NYSE:LYG) has also been taking measures to cut costs and push customers toward digital and mobile banking, as part of its five-year strategic plan. In September, the company announced plans to shut another 55 branches, which would mean the group will have closed nearly 300 branches between January 2024 and December 2025. LYG cited a decline in transactions in these branches as the reason for their closures.
During its recent Q3 2024 earnings call on October 24, the group reported £3.8 billion in statutory profit after tax for the first nine months of 2024, with a return on tangible equity of 14%. Year-to-date, the net income stood at £12.7 billion. Lloyds Banking Group plc (NYSE:LYG) saw a significant improvement in sequential income in Q3, aided by a 2% increase in net interest income during the quarter.
Wall Street analysts are bullish on the stock, with a consensus Buy rating and an average share price upside potential of 4%.
Overall LYG ranks 5th on our list of the best bank penny stocks to buy according to hedge funds. While we acknowledge the potential of LYG as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than LYG but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
