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Is this why the Lloyds share price keeps falling?

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Scene depicting the City of London, home of the FTSE 100
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The Lloyds (LSE: LLOY) share price has been an incredibly disappointing investment to own. Excluding dividends, over the past five years, the stock’s lost 16%. Over the same time frame, the FTSE 100 has risen in value by 3%. 

Over the past 12 months, the bank’s performance has improved, albeit modestly. The stock has increased in value by 65%, excluding dividends, since the beginning of August last year, although this was from a low level. And recently, shares in the bank have started to slide again. Since the end of May, the Lloyds share price is off 7%.

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However, during this time, the outlook for the bank, and the UK economy in general, has only improved. So why has the stock underperformed? 

Why does the Lloyds share price keep falling? 

There are a couple of reasons why I believe Lloyds has struggled to attract investor interest over the past few years. For a start, the UK banking market is incredibly competitive. Mortgage providers are currently fighting to attract business, which has sent interest rates plunging below 1%. 

As banks have been fighting each other for business, the Bank of England has kept interest rates pinned at their lowest levels in history. This is further constricting the banking sector’s ability to earn a reasonable profit margin on their lending. 

Then there are costs to consider. Banks like Lloyds are burdened with high costs from legacy technology systems, as well as having to deal with new regulations and taxes. All of these costs are eating away at margins. 

Unfortunately, there’s no telling when the battle for business will end, interest rates will rise, or costs will fall away. This uncertainty is what I believe is scaring investors away from the Lloyds share price. It’s tough to invest today not knowing what the future holds for a business. 

Opportunities grow 

The bank’s management is trying everything to grow earnings. From expanding its credit card business, to launching a wealth management joint venture, Lloyds has been diversifying to try and overcome the challenges highlighted above. 

These efforts have paid off. But lower interest rates and competition have offset some of the additional benefits. 

These headwinds are worrying, but the stock does have its good points. It’s currently trading at a low valuation of just 7.3 times forward earnings. It’s also projected to yield 5.3% this year, according to analysts. 

The bank’s valuation and potential to grow as the economy reopens are the reasons why I’d buy Lloyds shares for my portfolio, despite the risks outlined above. The entire financial sector has to deal with low interest rates and high costs, but it seems to me as if the market’s view of the Lloyds share price is too pessimistic compared to the rest of the sector. 

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Rupert Hargreaves 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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