The past four months have not been kind to shareholders of Lloyds Banking Group (LSE: LLOY). Since mid-January, the Lloyds share price has gone into reverse, notably after the Russian invasion of Ukraine on 24 February. However, after falling close to a quarter from their 2022 high, I see deep value in Lloyds shares today.
The Lloyds share price’s rise and fall
At the end of Covid-stricken 2020, the Lloyds share price closed that troubled year at 36.44p. One year later, on 31 December 2021, it closed at 47.8p. That’s a gain of almost a third (31.2%) in 12 months.
Lloyds shares then had a bright start to this year, hitting their 2022 high of 56p on 17 January. But then the Lloyds share price started sliding again — a fall made worse by the largest European conflict since 1945.
At their 2022 bottom, Lloyds shares plunged as low as 38.1p on 7 March. I’m still kicking myself that I missed the opportunity to buy at these levels. For me, that would have been a fantastic — and almost unmissable — bargain. Alas, personal circumstances prevented me from wading into LLOY that week.
On Friday, the Lloyds share price closed at 43.37p. That’s 5.27p (13.8%) above its 2022 low. But it’s also 12.63p (-22.6%) below its 2022 high. In other words, Lloyds shares are currently trading towards the low end of their 2022 range. And as a veteran value investor always looking to invest in beaten-down shares, this grabbed my attention.
Is the Black Horse bank selling too cheaply?
At the current Lloyds share price, the Black Horse bank (including all of its subsidiaries) has a market value below £31.3bn. To me, this seems like a stingy price tag for a Big Four UK bank with leading franchises in key growth areas. For example, Lloyds has Britain’s largest mortgage book and is second only to Barclays in UK credit cards.
What’s more, the Bank of England has been raising its base rate from the record low of 0.1%. Between 16 December 2021 and last Thursday (5 May), the Bank hiked its base rate four times to its present level of 1% a year. Rising rates are generally positive for banks, as these allow lenders to increase their net interest margins (NIM). Also, UK house prices have been rising and hit an all-time high in April.
Based on the current Lloyds share price of 43.37p, the shares trade on a modest multiple of 5.9 times earnings and a bumper earnings yield of nearly 17%. What’s more, the dividend yield of 4.6% a year is covered almost 3.7 times by earnings. To me, this suggests that there’s plenty of room for the bank to increase its cash payouts over time.
Then again, Lloyds did increase its loan-loss reserves by £177m in its latest quarterly results. This and other provisions contributed to first-quarter pre-tax profit dropping to £1.6bn, down 14% on Q1 2021. Despite these setbacks (and the steeply rising cost of living), I see Lloyds as a bargain and will buy it for my family portfolio very soon!