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Why is the Lloyds share price so cheap and will it ever change?

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Scene depicting the City of London, home of the FTSE 100
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Since the financial crisis, the Lloyds (LSE: LLOY) share price has had a cloud hanging over it. After the group came close to collapse in 2008, investors have stayed away. 

And it isn’t just Lloyds that’s suffered. UK investors have also been avoiding other large financial institutions. 

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This is one of the main reasons the Lloyds share price has struggled to move higher over the past decade.

However, in recent years, the bank has moved on from its mistakes. It has returned to full private ownership, restored its dividend, and dived into new markets. But all of these initiatives have failed to improve investor sentiment towards the company

Over the past five years, the stock has produced a total return of just 0.9% per annum. 

Unfortunately, it seems as if there’s another reason why shares in the bank haven’t budged over the past few years. It doesn’t look as if this headwind is going to disappear anytime soon. 

Lloyds share price headwinds

Something that’s affected every single bank in the UK, and indeed Europe, over the past 10 years is the interest rate environment.

Interest rates have been pinned firmly to the ground, punishing savers and lenders alike. When the pandemic started, central banks acted by cutting rates even further, only adding to the challenges banks face. 

If banks can’t lend at high rates of interest, their income will come under pressure. That’s what’s happened. Lenders have been struggling to grow profits. They’ve acted by slashing costs and expanding, but these efforts have only offset some of the declines in income.

At the same time, lenders have been fighting each other for business. This has only made a bad situation worse, although it’s been great news for borrowers. 

The good news is, it would appear, that this could be about to change. According to some economists, the Bank of England may hike interest rates in the first half of next year.

These are just forecasts at this stage, and there’s no guarantee the bank will take this action. Another wave of coronavirus could set these plans back a year or more.

However, if this scenario plays out, there could be a light for banks at the end of the long tunnel. 

Changing environment 

I think if interest rates rise, the Lloyds share price should react favourably. Higher rates will allow the bank to charge more for its loans and earn more income. This should help convince the market that the business is worth more than it was when rates were pinned to the floor. 

As such, I’d buy the stock today for my portfolio as a recovery play. In the meantime, the stock also offers a dividend yield of around 3%. After languishing for five years without returns, if interest rates start to rise next year, it could be Lloyds’ time to shine. 

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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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