With the Lloyds share price at under 26p, is there further to fall?

The Lloyds share price has already fallen 60% this year. But with Marshall Wace placing a large short position on the stock, Stuart Blair wonders where the bottom is.

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The Lloyds (LSE: LLOY) share price has been battered this year, falling from its January high of 64p, to its current price of under 26p. Despite attempts at a recovery, this means that shares are now trading at their lowest price this year. While many believe the bank stock is too cheap, others also believe that shares will continue to decline. In fact, Marshall Wace, one of the largest hedge funds in Europe, has revealed that it has a short position in Lloyds worth £100m. This is the largest bet against the bank for many years. But with the Lloyds share price already so low, is there really much further to fall?

Arguments against the UK bank

It’s no secret that the state of the UK economy is in turmoil. For example, in the second quarter, GDP shrank by 20.4%. There has been a slight recovery since, but it is expected to slow. With Lloyds almost solely focused in the UK, this should therefore continue to place pressure on the Lloyds share price.

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The recent rumours that the Bank of England could introduce negative interest rates is also bad news for the bank. Until now, the Bank of England has kept the base rate at 0.1%, arguing that negative interest rates would make mortgage lending unprofitable and force banks into financial difficulties. Even so, there is now talk of considering negative interest rates within the UK. This would not be good news for any banks, but it would be especially bad for the heavily UK-focused Lloyds.

There is also the bad news that Lloyds has been reprimanded by the Competition and Markets Authority (CMA). This came after it was forcing Covid-19-hit businesses seeking a loan into opening a business account with the bank, which charges a £7 monthly fee after the first 12 months. The threat of action from the regulator adds to the gloom surrounding the bank at the moment.

Can the Lloyds share price recover?

Although the bank is evidently facing a number of problems, I believe this is reflected in the share price. In fact, with a price-to-book ratio of around 0.4, this is an indication of a very cheap stock.

I also believe that its dividend could return in the near future. Compared to the 2008 financial crisis, banks are in a much stronger financial position due to tighter regulations and capital requirements. As a result, while loan losses will dent the profits of the bank this year, it should be able to get through the crisis without the need to raise extra capital. This should also allow the bank to resume dividend payments at some point in late 2021.

I therefore believe that, for the risk-tolerant investor, the Lloyds share price is a good long-term recovery stock. Saying this, in the short term, a further decline may be imminent. This is due to the significant number of problems facing the economy at the moment. As a result, investors should not expect any short-term gains, and must be willing to ride out the crisis. 

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Stuart Blair has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. 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.

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