I’ve been keeping a close eye on the Lloyds (LSE: LLOY) share price to see if it shows any signs of climbing back up to pre-pandemic levels anytime soon. The price is still down by 21% overall since the outbreak of Covid-19, but it has jumped up by 61% in the last 12 months.
If Lloyds does complete its recovery then its current price is surely an undervaluation. Does this low price provide an excellent buying opportunity for me? Here, I examine whether the share price could return to its former glory and what might possibly be holding it back.
Lloyds beats analysts’ expectations
I expect that Lloyds’ H1 FY21 report will be a delightful read for current holders of Lloyds shares. It demonstrates the bank’s resilience to continue on the path towards recovery with an optimistic outlook for the future. Net income rose to £7.6bn, up by 2% since H1 FY20, and average interest-earnings assets increased to £441bn. There was also a slight increase in statutory profit before tax to £3.9bn.
The UK’s economic reopening has also helped Lloyds, along with other banks such as Barclays, to accelerate its recovery. As long as the UK doesn’t have another catastrophic outbreak of Covid cases in the winter, the future for Lloyds could be promising.
Lloyds commits to property investment
Lloyds lends out the most amount of mortgages in the UK and is now planning to buy 50,000 homes in the next decade. This move could see Lloyds become one of the biggest private landlords in the UK by 2030. Its new venture will operate under a new brand called Citra Living in partnership with FTSE 100 company Barratt Developments. Lloyds estimates that it will generate around £300m in pre-tax profit from a standalone of 10,000 houses. However, I’m concerned over the potential risks of this diversification.
Lloyds has historically not performed well when moving outside of its major areas of business. For example, in 2019, Lloyds almost wiped out all of its third quarterly profits for mis-selling PPI. Lloyds exceeded other banks in the amount it had to pay out as compensation. The sum came to a total of £22bn.
Now the bank is moving into the housing market, another sector that it doesn’t have experience in. I question whether now is the time to be taking risks for Lloyds. Sure, the UK economy is picking up but the winter months could cause a spike in Covid-19 cases.
Will the Lloyds share price gain momentum?
I think there are definitely reasons to be confident that the future looks bright for Lloyds. I only need to point to its H1 FY21 report to show that progress is being made. However, I’m not convinced by the timing of Lloyd’s property investment plans.
In my opinion, the Lloyds share price should continue on this path of slow but steady growth. This is no problem for me as I’m more convinced by long-term growth shares over chaotic short-term stocks. I’d consider adding Lloyds to my portfolio with the expectation that it could look very profitable in a year or two.
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John Town holds no position in the shares mentioned above. The Motley Fool UK has recommended Barclays and 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.