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Lloyds Bank: what’s holding back this penny stock?

A brochure showing some of Lloyds Banking Group's major brands
Image: Lloyds Banking Group

In early June, Lloyds Bank (LSE: LLOY) touched 50p, its highest level in a year. It seemed like the FTSE 100 banking stock’s long awaited rally was finally getting underway. In fact, I even wrote an article asking if its share price would now rise above 60p. That has not happened so far, however. Quite the contrary, in fact. No sooner did it reach these levels that the penny stock started tumbling. It is now down by over 10% from those levels. 

To me, this begs the question – what  is holding it back?

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What’s holding back Lloyds Bank?

I think one reason is the still persisting stock market uncertainty. In July, the FTSE 100 index actually showed a marginal pullback from the month before. It has recovered this month, but it has not been without a few weak trading sessions either. A bunch of reasons has come together to slow down the stock market momentum. 

From the US to China, fresh impact of coronavirus is being felt. In China, there have been rising cases, to which authorities are responding swiftly. The US’s forecasts have recently been slashed owing to the virus as well. And there is an increase in Covid-19 cases evident in the UK. Also, inflation is still rising, which can further upset growth. Interest rates, on the other hand, are still low, which limits banks’ ability to improve their profits.  

Lloyds Bank’s dividends are also still low. It has a dividend yield of 2.8%, which is lower than the 3.5% average for the FTSE 100 index constituents as a whole. Before the pandemic, the bank paid generous dividends. However, since they have now been underwhelming for over a year now, it is easy to see how income investors have limited interest in the stock these days. 

The positives

That said, there are plenty of positives for it too. Late last month, its results beat analysts’ expectations. And it expressed confidence about the future as well. With the UK economy expected to continue recovering fast, the bank should continue to make progress. I would watch the pick up in loans as a key indicator of the market conditions it faces, which should pick up over time. Interest rates can also rise now, in response both to inflation and a potential increase in credit demand. 

What I’d do now

In a nutshell, I think there is still much to be optimistic about as far as Lloyds Bank goes. There are risks, of course. Residual uncertainty from the pandemic, slip ups in recovery, continued limited dividend payouts and a sustained rise in inflation can take their toll on its share price. But while they may be many in number, they need not all play out. Or even if they do, their severity may be quite limited. Over time, I expect the Lloyds Bank share price to rise. The penny stock is a buy for me. 

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Manika Premsingh 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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