As a shareholder in the banking giant Lloyds (LSE: LLOY), I am interested in its share price performance. Lately, frankly, that has been disappointing. Lloyds shares are now 14% lower than at the start of the year. Over the past 12 months, they have lost 11% of their value.
Does that present a buying opportunity for my portfolio? Or is the sliding share price an early warning signal that there are storm clouds on the horizon for bank shares such as Lloyds?
Strong business performance
Ignoring the share price, things look pretty healthy at Lloyds. It is the nation’s biggest mortgage lender and last year saw its post-tax profit surge to £5.9bn. The company currently has a market capitalisation of just over £30bn. That means that its price-to-earnings ratio is in the mid-single digits, which seems like good value to me.
Both deposits and loans grew last year. Although the growth in the loan book was a modest 2%, it stands at £449bn. That gives Lloyds an enormous business opportunity in coming years. As interest rates look set to keep rising, the bank ought to be able to profit handsomely from its existing huge loan book.
Why have Lloyds shares fallen?
Given the apparently strong performance in the business, it may seem a bit odd that Lloyds shares have drifted downwards and trade on what looks like a cheap valuation.
But share price valuations are – or ought to be — forward-looking. The current Lloyds share price suggests that investors are focussed less on the bank’s strong recent performance and more on the risks it faces as the wider economy stutters.
While higher interest rates could boost profits, they may also push far more borrowers into default. That might wipe out a lot of profits fairly fast at the bank. It could also set up longer-term challenges as Lloyds sought to recover. The last financial crisis pushed the price of Lloyds shares to pennies. They have stayed there ever since.
Investors seem to be worried that a recession coupled with growing interest rates could deal the bank another severe blow. Even if the bank performs better than 15 years ago, profitability could take a long time to recover.
My move
The bank took a charge to its accounts in the first quarter. That was to reflect a revised outlook, which it partly pinned on an “elevated inflation risk… and its potential impact on asset quality.”
More bad news could lead to bigger charges. That could well eat into profits. For Lloyds shares to recover to where they started the year, I think investors probably need to feel more confident about the broad economic outlook. That is possible, for example if economic trends improve or the bank’s results in coming quarters show resilience.
But things could equally start to go from bad to worse, driving Lloyds stock down further. For now I plan to hold my shares without buying any more.
