Lloyds Banking Group (LSE: LLOY) has had a tough year, along with other financial stocks. And for months, I’ve been fearing that the Lloyds share price could fall under 40p. Well, actually more like hoping, so I could buy more even cheaper.
It finally happened this week, and the 40p barrier was broken.
In a week when the government told us it wouldn’t cut spending, but is still slashing taxes, economists everywhere were possibly tearing their hair out.
Unsurprisingly, stock markets didn’t respond well. And financial stocks have been hit again. How far can the Lloyds share price fall before we’re truly looking at a no-brainer buy?
Valuation
Going on forecasts is risky. They’re often out of date and rarely take into account the latest news. And by the time this year ends, so much might have happened to make forecasts look silly.
But I reckon they can still be useful, providing we do a couple of things. One is check the fundamental strengths and weaknesses behind a forecast. The other is look for a good safety margin. On current forecasts, Lloyds shares are on a price-to-earnings (P/E) ratio of only six.
And the share price fall has pushed the dividend yield up to nearly 6%. That’s way ahead of the FTSE 100‘s 4%, in a year that could see the index’s second biggest dividend on record.
We’re also looking at a Price to Book ratio of around 0.6, which values Lloyds at only about 60% of its underlying asset value. That sounds crazy to me, providing the balance sheet is healthy
Balance sheet
At the interim stage, Lloyds reported a CET1 ratio of 12.6%. That’s down a bit from 13.1% a year previously, but it’s still strong.
In addition, risk-weighted assets had risen by £2.1bn, to £20.6bn, at 30 June. The results update spoke of “good performance in its core businesses including increased lending combined with rising interest rates and foreign exchange trading activity“.
That’s one reason why a bank should suffer less from rising interest rates. In fact, it should benefit, as they help to boost lending margins and profits. Total lending volumes can fall, of course, but they did the opposite in the first half of this year.
Risks
Lending might well fall in the second half, and that’s one of the risks. And Lloyds did recognise an £11m impairment charge “relating to expected credit loss driven largely by the future economic outlook“.
Contrasted with a £47m impairment credit in the first half of 2021, that’s not brilliant. But £11m isn’t much, and even if impairments rise in the second half (which I expect they will), I don’t see anything close to the pandemic crisis.
Any threat to the mortgage market is a threat to Lloyds, and that’s a real fear. And it’s entirely possible the bank might reduce its dividend in the short term.
The big question is whether there’s sufficient safety currently built into the very low Lloyds share price. For many, there clearly isn’t. But, for me, there is, and a top-up on Lloyds shares is a big possibility for my next purchase.