Lloyds (LSE:LLOY) shares have underperformed this year. The banking giant is a core component of the FTSE 100 and at 44p, it’s in prime penny stock territory. I already own Lloyds shares, but maybe now is the right time to buy more?
What’s weighing on the Lloyds share price?
There’s been a whole host of factors weighing on the Lloyds share price this year. Sky-high inflation, negative economic forecasts and a cost of living crisis have increased the risk of bad debt and defaults. Lloyds, the UK’s largest mortgage lender, has put £177m aside to protect the bank from potential defaults linked to the inflationary pressures.
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However, interest rates recently rose from 0.75% to 1%, meaning it can charge more for loans and mortgages. This rise will improve Lloyds’ lending margins, which is a major earner for the firm. However, 71% of Lloyds’ loans are mortgages and higher interest rates may negatively impact demand for borrowing. Analysts are not quite sure what mortgage volumes will do next.
Recent performance
Lloyds beat expectations in Q1. The lender reported pre-tax profits of £1.6bn, beating the average forecast of £1.4bn. However, pre-tax profits were down from the first quarter of 2021 when it recorded £1.9bn in profits. The drop was largely due to the £177m charge.
The banking giant fell just short of expectations in 2021. Pre-tax profit came in at £6.9bn. However, net income rose to £15.8bn, representing a 9% increase. Underlying net interest income rose 4% to £11.1bn.
Valuation
Lloyds has a price-to-earnings (P/E) ratio of 5.9. That’s particularly cheap and it looks less expensive than a number of its banking peers. The sector average is around 9.5. Barclays is an outlier here with an even lower P/E ratio of around 4.
With profits set to be slightly lower in 2022, Lloyds has a forward P/E ratio (based on forecast earnings) of just 6.5. That’s also a lot better than the sector average which is around 10.2.
And Lloyds also looks good value when we look at the price-to-sales (P/S) figure. The lender has a P/S ratio of 1.7. This is less than the sector average of 2.8.
Prospects
Lloyds is heavily focused on the housing sector with mortgage representing a huge part of the business. There might be some short-term pain for the bank if demand for mortgages fall on higher rates, but that’s not certain. UK housebuilder Taylor Wimpey recently stated that it doesn’t foresee a decline in demand for housing. And in the long run, I think demand for housing will stay very strong. After all, there’s a shortage.
I’m also interested in Lloyds’ plan to become a property owner. Through new brand Citra Living, the lender intends to buy 10,000 homes by 2025 and 50,000 homes by 2030. This could prove a highly profitable venture.
However, there are risks around the cost of living, inflation and negative economic growth forecasts. This could raise defaults and hurt the bank’s profitability.
Despite this, I’m bullish on Lloyds. I think it looks like a great buy at 44p and see considerable growth in the coming years. The 4.5% dividend yield is also attractive. I would buy more for my portfolio.
