I’m delighted to see the Lloyds Banking Group (LSE: LLOY) share price stage such a strong recovery. I’ve previously hailed the FTSE 100 stock a bargain, but it’s also made me nervous and some days I wouldn’t have touched it at all.
In April last year, I said the Lloyds share price looked like an unmissable bargain, trading below 30p, but you’d need nerves of steel to buy it. It now stands at 46p, so anybody who rose to the challenge will have been amply rewarded.
Yet my ambivalence continued. In October, just before November’s vaccine breakthroughs, I noted that the Lloyds share price had lost 95% of its value since peaking at 591p just before the financial crisis. Despite that, it remained the UK’s most traded stock and I wondered if Britons had lost their minds over it. Me included.
This FTSE 100 stock is tempting
The Lloyds share price was hammered by the pandemic, through no fault of its own. Big banks are hardwired into the wider economy. So when the government shut down the economy to contain Covid, banking stocks crashed.
Unlike the financial crisis, this time the banks aren’t to blame. This recession is government mandated. Officials also mandated that banks stop paying investors dividends, a dictat now rescinded.
The Bank of England also slashed interest rates to 0.1% to bail out the economy, but this destroyed net interest margins, the difference between what banks pay to savers and charge borrowers. The Lloyds share price was also hit by fears of rising debts and impairments.
Then came those vaccines and the great Lloyds share price recovery began. It’s been given a further shot in the arm by the end of Brexit uncertainty. The bank’s heavy exposure to the underperforming UK economy was seen as a weakness. Thanks to the nation’s vaccine success, and easing of Brexit tensions, this is now seen as a strength.
The Lloyds share price looks good value
With the UK opening up, the Lloyd’s share price has been on a tear. The big worry now is that the reopening may be threatened by the new Indian variant. While I believe we should be able to contain it, due to our vaccines and efficient genome tracing, there’s no guarantee.
I’m also worried that the housing market may be overheating. A crash would hit all the banks, but especially Halifax-owner Lloyds.
Inflation fears are a double-edged sword. If it forces up interest rates that will slow the recovery. But this will also allow Lloyds to increase net margins.
Despite these concerns, the Lloyds share price still looks like a bargain to me, trading at 7.8 times forward earnings and with a price-to-book ratio of 0.7. It also offers a projected yield of 4.4%, covered 2.9 times by forward earnings.
I’d buy with the aim of holding for the long term, and reinvesting all my dividends for growth.
