The Lloyds Banking Group (LSE: LLOY) share price has been falling. Over the past five years, its returns stand at a dismal -22.2%. Although it showed some signs of recovery after the pandemic, its shares have been falling steadily since May 2021, when it last touched the 50p ceiling.
But the UK banker still looks like a valuable buy for my portfolio when I consider its recent financial performance and market position. Can Lloyds share price make a comeback, and is it worth my buying its shares now? Let’s find out.
Share price valuation
Because of the recent share price drop, I think this FTSE 100 share is largely undervalued at the moment. At 43p, it is currently trading at a price-to-earnings ratio of 6.6. Furthermore, the bank resumed cancelled dividends in 2021.
The current dividend yield stands at 2.9% and is covered around three times by earnings. With analysts predicting a £5.3bn revenue in 2021, the yield could grow in the next couple of years. All this taken into consideration, the Lloyds share price looks like a bargain to me. But does it have growth potential? When in doubt, I always turn to the company’s financials.
The half-yearly report for 2021 looks promising to me. The bank recorded a profit before tax of £3.42bn. I think this is an excellent recovery after a disastrous H1 2020, when the bank recorded a loss of £290m.
But the total net income decreased by 6% to £459m, primarily due to falling interest rates on mortgages. My colleague Rupert Hargreaves discussed how Lloyds is offsetting falling interest rates by increasing credit card services. I think this is a shrewd move from the veteran UK lender.
Lloyds is also looking to make strides into real estate, given the booming housing market. Citra Living, its new housing brand, has established a collaboration with FTSE 100 company Barratt Developments. Lloyds plans on building 50,000 homes by 2030. Although many consider this a risky move, I see an upside. The UK housing sector is buzzing and I expect Lloyds shares to profit from this move over the next decade.
Share price prediction
Banking shares are very cyclical. Even if there is a brief fall in the market, the UK economy looks to me like it’s set to continue the recent recovery. As retail markets have reopened, consumer spending is increasing steadily. Also, reports suggest that interest rates could rise next year. This could improve revenue in the banking sector.
However, there are potential risks that make me uncertain. Global stock markets look shaky at the moment. Given the Evergrande situation in China, I think a further fall in Lloyds share price can be expected. Also, there might be a drop in demand for real estate in an uncertain economic climate which does not bode well for its recent investment. There is no guarantee that interest rates will rise next year, making me wary of Lloyds at the moment. I am watching its market performance closely and would consider an investment in Lloyds shares if there are strong signs of market recovery.
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Suraj Radhakrishnan 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.