Over the last five years, shares in Lloyds Banking Group (LSE: LLOY) have fallen by 22%. By comparison, the FTSE 100 has risen by 1.5%. So Lloyds has underperformed a poorly performing index. Yet the future is more important than the past. Could the Lloyds share price bounce back this year?
Reasons for optimism
It’s expected that because of steeply rising inflation, interest rates will go up this year. The obvious beneficiaries of this are banks. After all, banks make much of their profits from collecting more interest from borrowers than they have to pay depositors. Lloyds as the biggest UK retail bank is particularly well positioned to benefit from more interest on mortgages and other lending.
The UK government’s desire to avoid more lockdowns, coupled with a potential economic recovery, could well boost company profits. If company managers feel confident, they will be keener to borrow. This would help Lloyds, which has a market share of 19% when it comes to lending to small and mid-sized British businesses.
On top of these potential growth catalysts, the shares are cheap. The forward P/E is only eight, which is about in line with Barclays. The price-to-book value – another measure of value – is only 0.48 – indicating again that Lloyds shares are potentially undervalued.
There’s also plenty of potential for the dividend to grow. The dividend has restarted from a low base following (fingers crossed) the worst of the pandemic. There’s plenty of scope therefore for future growth, especially if earnings go up.
Lloyds also has a fairly new CEO. That may give it impetus in extending into new areas of business development, something that started under the previous chief executive. For example, it moved into becoming a landlord.
A reduced reliance on retail and commercial banking would probably help Lloyds to grow and help convince investors that earnings will grow over time. Without that growth, many investors, I think, would give the bank’s shares a miss.
The shares could still underperform
It’s not all rosy, of course. Interest rate rises could be very modest if inflation is temporary and could make little difference to Lloyds’ profit and loss account. In such a scenario, the shares would likely underperform in much the same way as they have in recent years.
A new variant leading to any further lockdowns could hit consumer spending, business confidence and the economy. The effect on investor confidence would likely see banking sector shares suffer. Lloyds would be no exception. Given its reliance on the UK economy, Lloyds could even be particularly hard hit.
I think there are reasons to believe that Lloyds’ extended period of underperformance may come to an end this year. But that being said, there are a lot of UK shares I like even more at the moment, so I’m in no rush to buy Lloyds.
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Andy Ross owns no share mentioned. 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.