Is the perennially underperforming Lloyds share price about to explode?

Through the ups and downs in its share price, Lloyds Banking Group (LSE: LLOY) has long commanded a loyal following among private investors. Indeed, it occupies an almost permanent place among the top 10 share buys on Hargreaves Lansdown’s platform. Despite this loyalty, the share price continues to disappoint. However, as the world recovers from Covid, interest rate rises loom, and a new CEO takes over with a growth strategy mindset, could this perennial underperformer finally deliver for the buy-and-hold private investor?

Leading UK bank

Lloyd’s value proposition is very clear. It is the UK’s largest provider of mortgages, current and savings accounts, and credit cards. It serves customers both digitally and physically, with over 18m digitally active users together with a significant branch network. This impressive footprint also provides the Group with a strong springboard to unlock new opportunities.

One such opportunity that the business is looking to grow into, is in the under-represented intermediary products space such as motor finance, home insurance, protection, individual pensions, and investments. The Group’s recent acquisition of Embark provides an early indication of their strategic intent here. Wealth management is a fast-growing area of financial services, as more people take an active interest in catering for their retirement needs.

Lloyds and investment banking

One of the main criticisms of Lloyds, and one of the reasons why its share price has underperformed, relates to its one-dimensional business model. Its rivals HSBC and Barclays both have thriving investment banking propositions. As historically low interest rates have bitten into net interest income margins, the ability to call on outside sources of income make a huge difference to the bottom line.

The Group now has a clear strategy to build a compelling proposition in this space. It will do this through strengthening its cash, debt, and risk management offerings in transaction banking, debt financing, and targeted markets investments. However, it is only intending to enter this foray through “selective participation”. This is probably a wise move. Building capabilities on a scale comparable to Goldman Sachs or JP Morgan would move Lloyds far away from its core offerings, as well as requiring a huge upfront investment.

Would I buy Lloyds now?

Delivering bumper profits for 2021, it seems as though the woes that it experienced throughout 2020 are now in the rear-view mirror. The mortgage book has grown by 4.7%. It has a sector-leading cost-to-income ratio of 57%, with a target of reaching 50% in the medium term. Credit card activity is beginning to pick up.

However, I still remain wary. As long as interest rates remain low, then Lloyds’ ability to grow its income will always struggle. Although profits surged in 2021, this was more to do with the release of impairment losses set aside due to Covid, rather than growing the bottom line.

Due to its domestic focus, the bank’s fortunes will always be inextricably tied to that of the wider UK economy. As inflation really begins to bite, the cost-of-living crisis escalates, and early signs appear that the mortgage market might have already peaked, I remain to be convinced that it is a good investment for my portfolio.