The Lloyds (LSE: LLOY) share price has been rising lately. The stock has jumped 29% over the past month.
Following this performance, it looks to me as if shares in the bank have well and truly started to recover from their Covid-19 slump. And with this being the case, I’ve been taking a closer look at the bank recently.
Lloyds share price performance
I think there are several reasons why investor sentiment has improved so significantly towards the lender over the past month.
Firstly, the development of not one but three effective coronavirus vaccines implies the end of the crisis is in sight.
Second, projected losses from the crisis have been nowhere near as bad as expected. At the beginning of the pandemic, some estimates suggested Lloyds would suffer tens of billions of pounds in defaulted loans this year. The actual figure is significantly less.
It’s certainly not enough to cause a significant problem for the group. The lender’s balance sheet is strong enough to weather the losses without having to ask investors or the government for extra cash.
Third, the government’s efforts to cushion the economic impact of the crisis and spur activity in 2021, has lead analysts to project a quick rebound in economic activity next year. If this growth materialises, the Lloyds share price may surge in value.
All of the above tells me that the outlook for the lender is bright. Granted, a third or fourth wave of coronavirus could cause further problems. But overall, it seems as if we are past the worst. Lloyds can now start planning for the future.
Long-term growth
As one of the largest banks in the UK, Lloyds’ fortunes are tied to those of the UK economy. If economic activity recovers next year, which analysts are projecting, I think the bank’s profits will recover as well.
What’s more, it’s likely the Bank of England will allow lenders to resume dividend payments in 2020. I reckon this will provide a double tailwind for the Lloyds share price. The resumption of dividend payments, coupled with rising profits, should draw investors back to the stock.
Therefore, I’m considering buying the shares ahead of this turnaround. Indeed, at current levels, it looks to me as if a market is still cautious about the bank’s medium term potential.
The stock is trading at a significant discount to book value, which suggests that it offers a wide margin of safety of current levels. In my opinion, this gives the investment an encouraging risk-reward profile.
An economic recovery next year may send the Lloyds share price higher, while any further decline in output could result in only minimal losses.
After considering this potential, I reckon one may see large total returns from investing in the lender at current levels for the long term.
