The Lloyds share price has crashed badly. Many FTSE shares have almost recovered from the market’s crash in March. But not Lloyds, which seems to be a bargain now. Is it a buy?
The Lloyds share price nosedive
As we all remember, Lloyds’s fall started at the beginning of the pandemic. The most obvious reason is the fact that banks generally take a hit from recessions. The Bank of England cut interest rates to zero. This is a problem for net interest income, which is a large chunk of banks’ profits. What’s more, banks have to prepare for a higher number of defaults on loans. The same is true of Lloyds.
A week ago the banking group reported quite horrible earnings results. Lloyds reported a pre-tax loss of £602m for the first half of this year, which is a disaster compared to a £2.9bn profit in the first half of 2019. That’s mainly because the bank set aside £3.8bn for bad loans. Tthis amount might even total £5.5bn for the full year. Not inspiring!
There is one more reason why the Lloyds share price became dirt cheap. All British banks were asked to cancel this year’s dividends by their regulator because of the pandemic. Well, Lloyds had to comply too.
Would I buy the dirt-cheap Lloyds share now?
I have just reread my first article on this well-established bank. I was quite bullish on the stock when it traded for more than 55p a piece. Among the positives I stated the low price-to-earnings (P/E) and price-to-book (P/B) ratios. I also mentioned its large size and operational history. These factors still apply now, although the P/E figure is likely to be negative this year. The bank seems to be even more of a bargain now at a price of less than 30p per share.
The company’s management seems to agree with this. According to Lloyds’s website, three insiders, the CFO, an independent director, and a group director, bought quite a lot of shares recently. This suggests that they still believe in the bank, which seems to be ‘too big to fail’.
At the same time, Lloyds is a large retail and commercial bank. That is, it primarily lends money to businesses and people like us. That’s pretty bad. Not only can the default risk get bigger as I’ve mentioned before, but the demand for loans can go down too. Normally, there is no need for businesses to borrow more if their activity falls or they go bankrupt. As concerns individuals, many of them cannot afford to borrow because they are out of work. The bank also relies heavily on providing insurance products. Obviously, the demand for them might fall further too for very similar reasons.
In a previous article I also warned about possible ‘black swan’ events. The pandemic became the black swan event for Lloyds and its peers. There’re more challenges, including the risks of a no-deal Brexit. However, in my view, the Lloyds share price is dirt cheap. It might be worth considering for brave long-term investors. I think there is still a risk it can go down. But, in my view, it will survive and even flourish some time later.
