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Should I buy Lloyds shares?

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I have been considering buying Lloyds (LSE: LLOY) shares for my portfolio for quite some time. I nearly came close to pulling the trigger in late 2019. Back then, it looked as if the bank had finally moved on from its financial crisis problems and was at the beginning of a growth spurt.

However, the coronavirus crisis forced me to rethink my opinion of the business. As loan losses piled up, it looked as if the bank would suffer years of low profits and high costs as it tried to recover all of the outstanding and defaulted loans. 

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Luckily, the Bank of England and the government acted rapidly to try and stabilise the economy. This has helped minimise the financial fallout.

At the beginning of the pandemic, some analysts speculated that the UK’s largest banks could come close to collapse under the sheer volume of defaulted loans. They never even came close. In fact, lenders like Lloyds have exited the crisis in a stronger financial position than they went in thanks, in part, to the dividend ban that was in place for much of last year. 

As such, I’m now once again considering adding Lloyds shares to my portfolio

Growth potential

I’m incredibly excited about the future of the UK economy. All economic indicators show it’s on track to recover from the coronavirus pandemic by the middle of next year.

There are also some signs that the pandemic has helped push pay and productivity across the economy higher as companies have invested in new tech and hiked wages for valuable staff. 

On top of this, consumers have saved tens of billions of pounds over the past 12-24 months. Once again, there are signs this money is being spent around the UK. 

As one of the UK’s largest banks, Lloyds’ fortunes are tied to those of the country’s economy. And as the economy returns to growth, I think the demand for loans and other financial products will increase. This should help Lloyds’ bottom line. 

The bank will also benefit from the fact it’s flush with cash. Its capital ratio was 16.1% at the end of March, compared to around 14% at the end of 2020. The higher the capital ratio, the more money Lloyds has to lend to customers, or return to investors. 

Lloyds shares on offer 

The combination of Lloyds’ strong balance sheet and UK economic growth suggests to me that now could be an excellent time to buy the stock. 

That said, the group is still likely to face some challenges as we advance. Low interest rates are causing havoc across the banking sector. These are likely to remain in place for some time, which will weigh on group profitability. At the same time, the bank could come under pressure again if coronavirus restrictions are extended. 

Still, despite these challenges, I’d buy Lloyds shares for their growth potential over the long run. 

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Rupert Hargreaves owns no share 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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