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Lloyds Bank: can the penny stock fall below 40p now?

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

Lloyds Bank (LSE: LLOY) is among the big FTSE 100 losers today. As I write, it is down by 3.5%, and is at a share price of around 43.6p. It is hardly alone in this, though. Many other stocks, including other financials and miners are down too. To put it even more simply, this not a good day for cyclical stocks. 

While the sharp fall today is explained by investor diffidence, the Lloyds Bank share price has been softening for a longer time. In the past three months, its share price is down some 6%.  The extent of the decline is not alarming, at least so far. However, I am not sure if the decline is justified.

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A robust UK economy to the rescue…

If anything, Lloyds Bank’s performance has been quite decent recently. And a pickup in the UK economy in the last quarter only goes in its favour. Unlike most other FTSE 100 banks, it is UK-centric, so a pick up in the economy can impact it far more positively than it does others. 

The economy was up by 22% year-on-year in the April-June quarter. While it is true that the latest monthly numbers for July are underwhelming, I would not make too much of just one month’s growth. And growth projections for the year remain strong as well. 

…despite a possible fall in house prices

There is some concern around the rollback of the stamp duty holiday, that could impact the housing market negatively. This is be particularly challenging for Lloyds Bank, which is the UK’s largest mortgage lender. However, if the economy continues to look good, I reckon that could provide a floor to how much house prices can fall as well. 

Lloyds Bank’s dividends are worth watching

Its dividends have made a comeback too. Its dividend yield is at around 3%, which admittedly is low. The average FTSE 100 yield is 3.5%. But I think it could rise further once it is less regulated, and its dividend made the bank’s stock an attractive one for investors earlier. 

What can go wrong with the penny stock

That said, I am watching the China situation carefully now. Property developer Evergrande has just said that it is unable to make its interest payments for now, which led to a sharp fall in its share price at the Hong Kong stock exchange and generally affected stock markets in Asia and Europe. It could be a signal of something bigger, or it could be a one-off event. The impact will be known only over time. 

If global stock markets remain shaky because of this in the foreseeable future, I think it is entirely possible that cyclical stocks on the FTSE will continue to suffer too. This includes Lloyds Bank, of course. And I would not rule out a fall below 40p in its share price if that happens.

Whether it stays there or not, however, is another question. Anyone who bought the stock at around 25p levels seen last September has been handsomely rewarded. Its share price is up around 75% since. 

Would I buy it?

But do I want to take that risk right now? I think that is where the stock loses out. There are far more promising stocks to buy when the markets are softening. For now I would focus on those, like miners, instead.

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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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