What’s pleasing to see is that Lloyds shares have passed the psychological barrier of 40p. I reckon the stock is making a comeback and I’d buy the shares today. Here’s why.
Stating the obvious
Let me start with the obvious. I’m not going to mask the fact that the 2020 full-year results were grim. Net income, which is revenue for banks, was down. And profitability took a hit.
I think this was to be expected, especially in a period of ultra-low interest rates. Lloyds is a UK bank that makes money by taking deposits and lending funds to borrowers. When interest rates are low, Lloyds can’t earn much on its loans.
What has been the saving grace is the mortgage business. This has been helped by the government incentive of the stamp duty holiday to boost the property market.
I believe the bad news is now out in the open and Lloyds shares could rise from here. I also think there are some positives about the bank.
Lloyds has a strong balance sheet. Banks are assessed by their Tier 1 Capital (CET1) ratio. For Lloyds, this is above 16%, which is higher than the regulatory requirement of 11%. This means that the bank has more than enough wiggle room should things turn ugly.
What’s encouraging to see is the resumption of dividend payments, even though the dividend was a small one. The pandemic has meant that the UK regulator has placed a cap on the amount of dividends the banks can pay out.
Lloyds has hit the regulatory cap for its 2020 full-year dividend. But then again, I don’t want too much to be paid out yet, especially when Lloyds is focusing on digitising the business as well as expanding into new products and markets.
In 2018, Lloyds announced that it would become a bank fit for the digital world. So far it has been investing in its IT infrastructure and moving to cloud-based applications.
The bank is also building out its offering to small and medium-sized businesses, as well as larger corporates and institutional clients. This means that Lloyds is trying to diversify its customer base, which should prove positive for the business in the long term.
There’s a focus on developing the wealth management business. I reckon this is a growth opportunity. Lloyds partnered with Schroders in 2018 to launch Schroders Personal Wealth. This service leverages the bank’s wide customer base and aims to offer financial planning advice. In fact, it expects it to be a top three financial planning business by 2025.
Let me be frank, it’s still early days for Lloyds shares. I don’t think interest rates will be rising any time soon. This could impact the bank’s profitability. If the pandemic continues and the UK recovery falters, the business is likely to be hit. Consumers and businesses will unlikely be able to pay off their loans and mortgages.
But, I think the bank has a strong balance sheet to weather the coronavirus storm. Hence I’d buy Lloyds shares in my portfolio.
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Nadia Yaqub 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.