Lloyd’s (LSE:LLOY) Shares are trading around 40p and are down 20% in the last 12 months. In fact, the blue chip title had pushed all the way up to the (now former) Chancellor’s mini-budget at the end of September.
The new government has spooked the markets and Lloyds is one of the worst hit stocks. But with the stock down 17% over the past month. So should I buy Lloyds shares?
What made the stock price move?
The recent downward pressure on the share price has been almost entirely caused by the new government and its attempts to shake up the UK economy.
The ex-Chancellor’s unfunded tax cuts and spending plans require more international borrowing and the news has sent the pound plummeting to its worst position against the dollar in decades.
It is also worrying because fiscal and monetary policies do not work in harmony. And current forecasts suggest that interest rates may need to reach as high as 6% in an effort to bring inflation under control.
Higher interest rates are good for banks, but the Bank of England‘s quick response has led many financial institutions to reduce the number of financial products on offer.
Bank shares also fell after reports that Prime Minister Liz Truss had considered changing the Bank of England’s money-printing scheme to save British taxpayers billions of pounds.
And then on Thursday, reports surfaced that officials were planning to do a U-turn on the mini-budget. The stock jumped 5%. They rose again on Friday.
Could Lloyds’ share price really double?
Lloyds shares last traded around 80p – double their current value – in 2015. Banks like Lloyds are often seen as a reflection of the health of the UK economy. And as such, share price growth has been hard to come by amid Brexit and pandemic concerns.
But Lloyds is doing pretty well right now. In July, the bank said net profit jumped 65% to £7.2bn for the six months to June 30. And with higher net interest margins (NIM) – they are very important for profitability – we can expect earnings to remain higher than they have been in recent years. In fact, for 14 years, interest rates have been close to zero.
With positive recent performance but quite negative investor sentiment, Lloyds is currently trading with a very low price-to-earnings (P/E) ratio – just five. By comparing, HSBC – which is more Asian-focused – is trading with a P/E of eight and Bank of America has a P/E of 10. The latter generally reflects more positive investor sentiment in the United States.
There are two main reasons why I think the Lloyds share price could reach 80p over the next five to 10 years.
First, I consider the bank to be undervalued. It’s certainly not that exciting as it focuses on the UK mortgage market. And the P/E is not in line with other more interesting banks. I expect investor sentiment to improve in the coming months, especially if earnings remain at their current levels.
Second, we appear to be entering an era of higher interest rates with inflation expected to remain higher over the long term. Higher NIMs will give banks like Lloyds a huge boost. As such, I’m buying more Lloyds shares in hopes of long-term gains.
Bank of America is an advertising partner of The Ascent, a Motley Fool company. James Fox holds positions with Lloyds Banking Group and HSBC. The Motley Fool UK recommended HSBC Holdings and Lloyds Banking Group. The opinions expressed on the companies mentioned in this article are those of the author and may therefore differ from the official recommendations we give in our subscription services such as Share Advisor, Hidden Winners and Pro. At The Motley Fool, we believe that considering a wide range of ideas makes us better investors.
Motley Fool United Kingdom 2022