Lloyds Banking Group (LSE: LLOY) has been in impressive form since the pandemic, making billions of pounds in profits. Yet the Lloyds share price has fallen 16% over the past year. The first half of this year showed sizeable profits, but they were smaller than last year. So could the price keep falling – or should I consider buying the shares again for my portfolio?
Turbulent times
The main reason I see for the fall is concern among investors about the economic outlook. With the UK in recession and the risks of a property crash rising, Lloyds’ position as the nation’s leading mortgage lender could turn from being an advantage into a source of potential weakness.
If rising interest rates combined with tightening household budgets lead more borrowers to default on their loans, that could hurt Lloyds’ profits.
At the same time, I do see an opportunity in the economic uncertainty. Take interest rates, for example. Now that rates are higher, I see more potential for lenders like Lloyds to increase their profitability by spreading the gap between what they pay to borrow money and how much they charge to lend it out.
If that helps profits grow again and the economy improves, I think the shares could climb.
Long-term outlook
As someone with a long-term approach to investing however, I try to look at what the prospects are for a company years or decades ahead. On paper, I see a lot to like about Lloyds. It has a leading position in the UK banking market as well as a collection of well-known brands. I expect demand for financial services to stay strong for the long term, regardless of how much the economy moves around.
But the concern I have is that banking is an industry where even strong long-term prospects can be permanently damaged in a relatively short amount of time by a financial crisis. We saw that in 2007, for example. Even today, the Lloyds share price and dividend remain far below what they were at that time. The problem is that the financial system is so interconnected, with a lot of risks that ultimately no one can really control, such as a collapse in asset prices.
So although I do see reasons to be upbeat about where Lloyds might get to in the long term, the question is whether it can indeed get there smoothly, or will it suffer badly from a worsening economy along the route?
The Lloyds share price might not be cheap
I do not know the answer to that question – nor does anyone else.
If economic problems badly hurt the property market and damage profitability at banks like Lloyds, it could take years for them to recover. That timeline could be long and there is no guarantee that dividends will continue. They remain lower now than before the pandemic, despite mammoth profits and a share buyback, suggesting to me that the dividend is not a key priority for management.
So if things get worse, I reckon the Lloyds share price may not climb and could in fact fall further. For now, I continue to avoid the shares.