Should I buy more Lloyds shares or this FTSE rival yielding 9.2% with a P/E of just 7.6?

I’m thrilled with my Lloyds (LSE: LLOY) shares. They’re up 38.98% over the last year and still showing plenty of forward motion. Throw in a trailing yield of 4.54%, and the total 12-month return is 43.52%.

They’re climbing again today, boosted by news that consumer price inflation has fallen to just 1.7%, comfortably below the Bank of England’s 2% target. That’s good news for Lloyds, which remains the UK’s biggest mortgage lender and should benefit as interest rates fall. Lower borrowing costs may also cut debt impairments.

Which is the better FTSE 100 bank?

The downside of falling rates is that they could squeeze Lloyds’ net interest margins, the difference between what banks pay savers and charge borrowers. These fell to 2.98% in the final quarter of 2023, down from 3.08% in Q3. 

Margins settled at 2.95% in Q1 2024, but the group still expects them to stay above 2.9% across the financial year.

Where the Lloyds share price goes next partly depends on the UK economy, which stalled over the summer, and the impact of Labour’s Autumn Budget. 

There’s another worry, in the shape of the financial regulator’s investigation into claims of motor finance mis-selling. The board has set aside £450m to cover claims but the ultimate bill is unknowable. Either way, I’m not too worried. I’m holding my Lloyds shares for years, and expect to get plenty more dividend income and share price growth in that time.

With the stock looking decent value with a price-to-earnings ratio of 7.59 and price-to-book ratio of 0.8, I’ve been tempted to buy more. But then FTSE 100 rival HSBC Holdings (LSE: HSBA) caught my eye. It boasts even more impressive numbers, as my crude table shows.

HSBC has a trailing yield of 7.9%. Its forecast yield is a blockbuster 9.2%. That’s comfortably ahead of Lloyds, although cover is thinner at 1.5.

Interestingly, both have the same price-to-book ratio of 0.8, and return on capital employed of 14.6%. Forecast operating margins are slightly higher at HSBC, but both stocks score well on this front.

Both offer brilliant dividend yields

What my tables don’t show is the potential risk/reward ratio, which is wildly different. Lloyds is a relatively solid, low-risk operation, focused on UK retail and small business banking services.

HSBC has the whole of China and Asia to aim at. Yet this doesn’t automatically make it a more lucrative investment. It’s been exposed to the slowdown in the Chinese economy. That partly explains why the HSBC share price is up a meagre 2.54% in the last year, a fraction of the growth that Lloyds has delivered

HSBC is torn between West and East, as Western suspicions of the world’s second biggest economy grow. As risks go, I think this dwarfs motor finance mis-selling.

I might buy some HSBC shares for diversification purposes, when I have the cash. But Lloyds will remain my number one banking sector play and one of the favourite stocks in my entire portfolio.