As I write on Thursday afternoon, Lloyds Banking Group (LSE: LLOY) shares stand at 43.3p, down 0.5p (-1.1%) today. And here’s how the Lloyds share price has performed over six different timescales:
| Five days | -0.3% |
| One month | -4.6% |
| Year to date | -9.5% |
| Six months | -11.8% |
| One year | -9.8% |
| Five years | -39.7% |
As you can see, the Lloyds share price has fallen over all six periods. It’s dropped 9.5% in 2022 so far and lost 9.8% of its value over the past 12 months. Even worse, it’s been a crummy investment over the past half-decade, losing 39.7% of its value.
So, now is a bad time for me to buy Lloyds shares, right? Who knows? But not necessarily. That’s because buying at the current Lloyds share price means buying into the Black Horse bank’s future and not its past.
What might go wrong for Lloyds?
As one of the UK’s leading retail banks (and without any investment-banking operations), Lloyds is a fairly simple business today. It takes in cash deposits from savers and then lends this money at higher interest rates to borrowers. The difference between these two rates is the bank’s net interest margin (NIM). And the higher the NIM, the more money the bank makes — which should be good for the share price.
With the Bank of England currently hiking the base rate, rising interest rates ought to spell good news for Lloyds and its peers. After all, the group has the UK’s largest mortgage book — and house prices have been rising strongly in 2021-22. Also, Lloyds is the second-largest issuer of credit cards, after Barclays.
However, several external factors might batter the Lloyds share price during 2021-22. First, a sustained UK house-price crash could be brutal for Lloyds and its balance sheet. Though this hasn’t happened since the global financial crisis of 2007-09, it could well happen again.
Second, a global or UK recession could suppress consumer spending and bump up bad debts. Again, this would harm Lloyds’ future earnings. Third, rising inflation (the ‘cost of living’ crisis) and higher interest rates could snuff out economic growth. And then there’s also Covid-19, the Russia/Ukraine war and slowing Chinese growth to worry out.
To sum up, I could see a combination of these negative outcomes hitting the Lloyds share price hard. Indeed, it’s possible that it might just crash back to the lows seen during 2020’s Covid-19 crisis. At their pandemic low, Lloyds shares collapsed to an intra-day low of 23.58p on 22 September 2020. Yikes, huh?
I see the Lloyds share price as a bargain
With stock markets sliding all around the globe this month, it’s easy to give up and walk away from buying shares right now. However, based on these fundamentals, I see Lloyds’ stock as too cheap today.
Price-to-earnings ratio: 5.8 | Earnings yield: 17.2% | Dividend yield: 4.6% a year
To sum up, I know it’s hard to buy shares when prices are crashing all around. But I genuinely regard Lloyds as being unfairly consigned to Mr Market’s bargain bin right now. That’s why I’d be happy to buy into the bank at current price levels!