The Lloyds (LSE: LLOY) share price is down nearly 7% in the last month. This is despite the Bank of England’s recent interest rate hike and Lloyds’ positive annual financials report. And now, financial services firm JPMorgan has slashed its revenue estimates for European banks by nearly 15% after weighing the economic trickle-down from the sanctions against Russian businesses. What does this mean for the Lloyds share price recovery? And am I still considering an investment in one of the UK’s biggest banks right now?
Economic recovery
The analysis by JPMorgan states that the major reason behind downgrading the revenue estimates of European banks is the “economic spillover effect on Europe” due to the war in Ukraine. But the report also stated that banks are better prepared for tough times this time around after the market reaction to the pandemic. In fact, the investment firm stated that the “risk-to-reward balance on European banks is positive following the recent share price resets”.
And despite the share price volatility over the short term, Lloyds’ annual report looked robust to me. The banking group managed to record a profit before tax of £6.9bn, up a whopping 462% from 2020. The company recorded a better cost-to-income ratio in 2021 after letting go of 4,000 employees. Total loans approved went up by £9bn and total customer deposits were £25bn higher than the previous fiscal year. From the perspective of a potential investor, shareholder returns have been steady too. Earnings per share went up to 7.5p in 2021 from 1.2p in 2020. And after a solid rebound, the group has announced a £2bn share buyback and the current dividend yield stands at 4.1%, which is set to go ex-dividend in less than a month, on 7 April 2022.
The Lloyds share price is currently at 48p, trading at a price-to-earnings ratio of a measly 6.4 times. With the housing industry boom set to extend across 2022 and the recent interest rate hike, Lloyds is looking at increased earnings from loans this year. And I think this undervalued share is a big FTSE 100 bargain for my long-term portfolio right now.
Lloyds share price concerns
Despite my bullish stance, my potential investment does carry some risks as well. Market volatility, fluctuating commodity prices and government sanctions have already hit UK banks hard. And financial institutions could suffer in the coming months if the Ukrainian crisis worsens. And despite increased borrowing in the country, further interest rate hikes to curb rising inflation could put off loan seekers in the short term and effectively kill the housing boom. The banking group’s corporate clients are already liquidating a portion of their assets to fund inflated operating costs. This could eat into revenue from Lloyds’ corporate clients. And if inflation increases, individual customers could pull investments as well.
But despite these risks, the UK’s largest lender is a proven FTSE 100 banking stock with an above-average yield. The stock could be a strong recovery option for my portfolio provided larger economic turbulence settles, which is why I would consider an investment if the share price falls again.
