UK banking group Lloyds (LSE: LLOY) has struggled year-to-date and the stock is down nearly 8%. In fact, over the past five years, Lloyds shares have tanked 33%. After struggling with the side effects of the pandemic, Lloyds now faces tough economic conditions as inflation in the UK has hit a 30-year high.
The tail end of 2019 saw its shares trading for over 65p. Yet today the stock is floating around the 45p mark. So, should I be buying Lloyds shares? Let’s take a look.
Bull case
The main reason I like the look of Lloyds is its low valuation. The stock currently trades on a price-to-earnings (P/E) ratio of 6.12. This sits well below the benchmark P/E ratio of 10. And couple this with the substantial dividend yield of 4.38% that Lloyds shares offer, I think the stock at its current price could be a great addition to my portfolio.
Another reason I am bullish on Lloyds is rising house prices. Average UK home prices have increased by more than £43,000 since the beginning of the pandemic. And March saw record highs for average prices, representing a 1.4% increase on February –- the fastest growth witnessed in six months. As the UK’s biggest mortgage lender, a continuation of this growth should allow Lloyds to thrive.
It has also made strides to expand into the wealth management and investment banking space. And under the leadership of Charlie Nunn, the firm is in the process of streamlining. While unfortunate for the soon-to-be ex-employees, Lloyds plans to close as many as 100 branches as it turns its attention to online banking. I deem this a smart move, and while the business may take a hit in the short term, over the long term this should benefit it massively.
Where Lloyds may also benefit is from current economic conditions. With inflation seemingly on a constant upwards trajectory, the Bank of England has hiked interest rates to counteract this. For Lloyds, this means it will be able to charge lenders more when they borrow, which will boost the bank’s revenues.
Bear case
However, rising inflation also brings issues. With the cost of living rising, this may mean people are less likely to take out a loan. As such, Lloyds may actually find its revenues falling. The rise may also mean it finds customers defaulting on payments. This would have an adverse impact on the Lloyds share price.
On top of this, while the business will no doubt benefit from rising house prices, the rates of growth we have seen are expected to slow as the year goes on.
Why I’d buy
Despite the issues, the business may face amid rising inflation, the potential benefits from this may help offset some of the losses. I also like Lloyds due to its low valuation. And along with its above average dividend yield, and streamlining attempts, I believe Lloyds shares have the potential to thrive in the future. As such, I would be willing to add the stock to my portfolio today.
