By this time next year, Lloyds Banking Group (LSE: LON:LLOY) should have a new chief executive. Shareholders will be hoping that Lloyds’ share price, which has fallen by 50% in this year’s stock market crash, will have risen again.
The bank’s share price slump is partly down to the market crash and this year’s dividend suspension.
But I think Lloyds’ weak share price is also linked to the bank’s growth problem. Even before Covid-19, Lloyds’ profits were expected to be pretty much flat in both 2020 and 2021.
Coronavirus means that earnings will fall this year. But with the bank’s shares trading at levels not seen since 2011, I think Lloyds shares could be too cheap to ignore for long-term investors.
The story so far Lloyds’ current chief executive, António Horta-Osório, has been in place for nine years. During that time he’s repaired the bank’s finances and exited the 2008 government bailout. He’s also developed the group’s UK-focused mortgage, car loan and credit card businesses.
This heavy exposure to the UK economy might not be great news in the short term. Rising unemployment and a possible recession seem likely to result in an increase in bad debt and a slowdown in new lending.
However, Lloyds’ costs are lower than rivals and the balance sheet looks pretty strong to me. I’m confident the bank will ride out the storm.
Lloyds’ share price needs growth I think Lloyds’ strict focus on UK retail and commercial banking is wise. But the firm does have a growth problem. Interest income and revenue from lending just isn’t growing.
To some extent, this is a problem for all banks. Ten years of ultra-low interest rates have made it more difficult to make money from mainstream lending. Lloyds hasn’t done too badly, but lending levels and interest income have been flat since 2017.
One hope is that Lloyds’ expansion into wealth management in partnership with Schroders (LON:SDR) will help to generate more fee income. This can be earned regardless of interest rates, but the rise of cheap passive investment funds mean that profit margins in this sector are generally under pressure.
Whoever replaces Mr Horta-Osório will need to find a way to return the business to growth. But I think they’ll have a strong foundation to work with. Given the fall in Lloyds’ share price this year, I think now could be a very good time to buy.
Why I’d buy Lloyds shares I don’t know what the next 18 months will hold. But I’d always buy stocks such as Lloyds with a long-term view — at least five years. On this timeframe, I think the last-seen Lloyds share price of 31p offers good value.
At this level, the shares are trading at a 45% discount to their tangible book value. Broker forecasts suggest the bank will pay a 2p dividend in 2021, giving a forecast yield of 6.6%.
Banks have underperformed for many years due to their low profitability. But Lloyds has been one of the best performers in this sector and has paid generous dividends since 2015. Over time, I can see Lloyds’ share price doubling back to the 60p level we saw at the start of 2020. I rate the shares as a safe long-term buy for income investors.
The post Is the Lloyds share price too cheap to ignore? appeared first on The Motley Fool UK.
Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group and Schroders (Non-Voting). Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2020
First published on The Motley Fool
