Could beaten down Lloyds shares boost my portfolio?

Lloyds shares haven’t performed well in 2022, down 15% over the last three months. But for me, it looks like a great opportunity to grow my portfolio.

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Lloyds (LSE:LLOY) shares haven’t displayed the stability one might expect from a banking giant this year. The largest UK retail and commercial financial services provider has seen its share price fluctuate between 38p and 55p amid a series of pressures. These pressures include higher inflation, higher interest rates and a cost of living crisis.

Today, Lloyds is trading towards the bottom end of its yearly range with economic concerns heightened. But I see this as a good opportunity for me to buy. Lloyds will probably never reach its pre-financial-crash heights, but there are signs the share price could really pick up. So, here’s why I’m bullish on Lloyds.

Valuation

Lloyds has a price-to-earnings (P/E) ratio of just 5.8. That’s very cheap, especially for a banking giant that should have a positive future ahead of it. Its forward P/E — based on projected earnings for the year — also looks pretty cheap at just 6.2.

Here’s how Lloyds compares with other UK banking majors.

StockP/E ratio
Lloyds5.8
HSBC10.1
Barclays4.1
NatWest9.25

Recent performance

In April’s quarterly update, Lloyds beat expectations, posting pre-tax profits of £1.6bn. This was down from £1.9bn the year before, but ahead of analysts’ forecasts of £1.4bn. As the UK’s largest mortgage lender, Lloyds benefited from rising Bank of England base rates. This also led it to revise its guidance upwards for returns on tangible equity and net interest margin. The group forecast a banking net interest margin of 270 basis points, up from 260. Further interest rate rises, which appear likely, will boost the margin further.

One reason for the falling profitability was a £177m charge meant to protect the bank from potential defaults linked to the inflationary pressures. This was in stark contrast to the year before when Lloyds released £360m of the cash originally put aside for Covid-related impairments.

Prospects

I’m bullish on Lloyds’ long-term prospects. The bank is the UK’s largest mortgage lender. And mortgages account for 71% of its loans. So, there may be some short-term pain if higher interest rates dampen demand for new homes.

But I’m confident that the UK’s property market will remain strong in the long run, primarily because successive governments have failed to address housing shortages. It’s also true that higher interest rates could benefit the bank’s mortgage lending in the long run. By historic standards, rates over the last decade have been extraordinarily low. But if house buyers become accustomed to slightly higher rates, the bank would benefit considerably.

I’m also excited by Lloyds’ move to become a property owner. The bank intends to buy 50,000 homes over the next decade. This will add more diversity to its operations, although still with a heavily weighing towards property.

It has attempted to diversify in other ways, offering more financial services to its customers, but it may be a while before we see the impact.

Will Lloyds soar?

I think Lloyds could do very well in the coming years. For me, it currently looks particularly cheap compared to some of its peers, and I think the bank’s weighing towards property will be beneficial in the long run. I’ve already bought Lloyds shares and would buy more.

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 assessed. Consider taking independent financial advice.

James Fox owns shares in Lloyds. 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.

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