The Lloyds (LSE:LLOY) share price has recently been on a bit of a downward spiral. After the company released its full-year results for 2021 on 24 February, the stock took quite a tumble. And since then, it’s down by almost 15% (but up by 10% over the past year). What was in these results that has investors so upset? And is this secretly a buying opportunity for my portfolio? Let’s explore.
The Lloyds share price versus earnings
Despite what the share price would indicate, earnings weren’t seemingly all that bad. Net interest income from its issued loans grew by a mediocre 4%. But with Covid-19-related impairment charges virtually nowhere to be seen, pre-tax profits came in at a massive £6.9bn. That’s up from £1.2bn a year ago and is even higher than the £4.4bn reported in 2019.
Given this is obviously positive news, why did the Lloyds share price drop? From what I can tell, two primary factors explain the downward momentum. The first is the generally jittery market environment investors are currently in. But the second is simply that these results weren’t quite good enough to keep shareholders happy.
The consensus from analysts placed the forecast for pre-tax profits at £7.2bn, meaning Lloyds missed expectations target by around £300m. And it’s not uncommon for stocks to take a hit following disappointing results. But is this a buying opportunity or a sign of trouble ahead?
Time to buy?
At a price-to-earnings ratio of 6, the Lloyds share price is starting to look relatively cheap, in my opinion. But there could be a good reason why the market has priced the business so low. When looking at the full-year results, the main culprit behind the missed earnings target was a spike in total costs – specifically a £1.3bn remediation charge.
What’s this? Basically, it’s a fine the bank has to pay for breaking the rules. Around £510m is related to legacy issues that have already been largely resolved. But the remaining £790m is the group’s full liability to victims of the HBOS Reading fraud.
As a reminder, HBOS is one of Lloyd’s insurance subsidiaries acquired in 2009. It was discovered that corrupt staff were miss-designating hundreds of businesses as impaired, allowing the group to illegally seize assets. This is arguably one of the worst banking scandals in recent years. However, it’s worth mentioning that the fine is ultimately a one-time charge. So, from a purely financial perspective, it seems the Lloyds share price is currently being affected by a short-term issue.
Fraud is hardly a new concept in the world of banking. And it’s a leading reason why some investors boycott the industry entirely. But regardless of the moral argument, banks like Lloyds ultimately provide services that enable businesses and consumers alike to grow capital.
Now, with interest rates rising, the bank’s lending margins are set to expand. And pairing increased profitability with a low share price makes Lloyds potentially one of the best UK shares for me to buy now. At least, that’s what I think.