I’ve been buying shares in Lloyds (LSE: LLOY) since the market started falling in February. Following the spread of coronavirus, the share price has been hard hit by the expected economic downturn. And now you can add the suspension of dividends. The bank, and the wider banking sector, is certainly facing tough near-term challenges.
The bad news first
Like all its peers, Lloyds has been strong-armed into cutting dividends. This has hit income investors hard, since the bank was offering a dividend yield of above 6% in January. Now of course, there’s uncertainty about when a dividend will be reintroduced.
The effect of the coronavirus on the economy will also have a wider impact on Lloyds. Businesses failing and people losing their jobs will hit its bottom line. This will undoubtedly push up bad debts, which will further hit the bank’s finances.
Then there’s the effect the interest rate cuts will have. In March, it was sliced to just 0.1%, directly hitting profits, further compounding the low-interest environment experienced for over a decade.
There’s also the double-edged sword of Lloyds’ reliance on the UK. If the domestic economy slumps for a prolonged period, Lloyds share price is likely to be hit harder than some other banks.
The reasons this FTSE 100 share can bounce back
But I think there are reasons to be optimistic. The shares are now incredibly cheap, trading on a P/E less than five. The shares have fallen by over 55% so far this year. This looks overcooked for me, given how well run the bank is and how profitable it has been.
It’s also a well-managed operation with a CEO that has served since March 2011. António Horta-Osório is highly-regarded and has stayed with the bank despite rumours of interest from many other leading banks. He’s also successfully returned the bank to private ownership following the last financial crash.
Meanwhile PPI, the mis-selling scandal that has plagued the big banks and their profits for years, has finally drawn to a close. Like its peers, Lloyds had to set aside billions of pounds each year to refund customers. That’s billions that can now be used to strengthen the balance sheet through these tricky times.
Despite the backdrop of low interest rates and penalties for past bad behaviour, Lloyds has been hugely profitable in recent years. In the last full year, underlying profits were £7.5bn. It’s also maintained a tight grip on costs while digitisation could continue to help Lloyds strip out costs within the business.
So Lloyds is one FTSE 100 share I feel confident in. Particularly in its ability to bounce back strongly once investor confidence returns. In my opinion, the shares are simply too cheap to ignore, given how well the bank has performed in the past.
