As the Lloyds share price falls, should I sell – or buy?

The Lloyds share price is 10% lower than a year ago. Our writer considers what he should do now.

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The high street bank Lloyds (LSE: LLOY) has seen its business perform fairly well in recent months. But the share price has fallen 10% over the past year. Is that a buying opportunity to add more Lloyds shares to my portfolio? Or is the sliding price a signal that I ought to get out at the current price while I can?

Strong business performance

The bank’s business performance continues to impress me. In its first quarter, it reported post-tax profits of £1.2bn. That was a 14% fall from the £1.4bn recorded in the same period last year. But it is still a big figure. Banking results tend to move around from quarter to quarter, but Lloyds has demonstrated that its business is a powerful profit machine.

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The company is trading at a sizeable discount to its tangible net assets per share of 56.5p. The current share price is around 24% lower than that.                                          

However, if I buy Lloyds shares today, what will impact my returns is not past performance but what comes in future. Here I think the picture is mixed. On the positive side, the company has upgraded its full-year expectations for banking net interest margin and return on tangible equity.

But I reckon a worsening economic environment poses risks to the banking sector generally, including Lloyds. That could lead to increasing defaults on loans, eating into profits.

Why is the Lloyds share price falling?

Does that risk justify the slide we have seen in the Lloyds share price? I think it may do.

Lloyds shares looked cheap to me for a while. However, management has been restrained in raising the dividend. It continues to sit below its pre-pandemic level. The Lloyds share price means the yield is still fairly attractive to me, at 4.6%. But I wonder what is in store for the dividend if the bank does start to feel more pain from a worsening economy.

I also am concerned that the business could see profits collapse if the economy does move into a deep recession. Not only could that hurt the dividend, I think it also threatens the underlying investment case for Lloyds. The bank is a bellwether for the British economy, given its domestic focus and market-leading mortgage book.

So I am increasingly wary of buying more Lloyds shares for my portfolio. I think the falling share price reflects growing investor concerns about profitability over the next few years.

Should I sell my Lloyds shares?

Given that I am not growing my position at the current Lloyds share price, does it make sense for me to sell the stock?

For now, I do not plan to do that. It is unclear how long or deep the economic challenge will be. It may be that the UK economy does better than expected in the next several years. Lloyds has a strong collection of banking brands, a large installed customer base and a deep market understanding.

Over time, I expect the company to do well. As an investor with a long-term mindset, I am happy to keep holding the Lloyds shares I own for now.

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Christopher Ruane owns shares in Lloyds Banking Group. 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.

Should you invest the value of your investment may rise or fall and your Capital is at Risk. Before investing your individual circumstances should be considered, so you should consider taking independent financial advice.

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