Is this why the Lloyds share price keeps falling?

Rupert Hargreaves tries to figure out why the Lloyds share price keeps falling despite the firm’s improving fundamentals and economic outlook.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Scene depicting the City of London, home of the FTSE 100

Image source: Getty Images.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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%.

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. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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.

More on Investing Articles

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »

Investing Articles

3 ideas to help investors aim for a million-pound Stocks & Shares ISA

The UK has a growing number of Stocks and Shares ISA millionaires, and this plan may be one of the…

Read more »

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »