Down 14% so far this year, can Lloyds shares recover?

Lloyds shares have fallen since the start of 2022. Our writer considers why — and whether the chance of price recovery justifies him increasing his holding.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Stack of one pound coins falling over

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

sdf

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.


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.

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.

More on Investing Articles

High flying easyJet women bring daughters to work to inspire next generation of women in STEM
Investing Articles

In 12 months, a £10,000 investment in easyJet shares could become…

easyJet shares have plunged in value following a profit warning on Thursday (17 July). Can the FTSE 100 travel share…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing Articles

This S&P 500 blue chip looks far too cheap to me at $183!

Our writer picks out one high-quality S&P 500 stock that is currently the cheapest among the 'Magnificent 7' group of…

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

Down 23% today! This one’s stinking out my Stocks and Shares ISA

Our writer's wondering what to do with a problem named Ashtead Technology (LON:AT.) in his Stocks and Shares ISA portfolio.

Read more »

Two male friends are out in Tynemouth, North East UK. They are walking on a sidewalk and pushing their baby sons in strollers. They are wearing warm clothing.
Investing Articles

Down over 20%, should I dump this FTSE 100 dividend stock?

Our writer has been loving the passive income this dividend stock has been throwing off. But does the big share…

Read more »

Businesswoman calculating finances in an office
Investing Articles

I’ve just bought this FTSE share…

Our writer explains the thought process that led to him buying this FTSE share. One that’s likely to do well…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Just over £5 now, easyJet’s share price looks cheap to me anywhere under £13.84

easyJet’s share price has dropped recently, which could mean the business is worth less than before. Conversely, it could mean…

Read more »

Trader on video call from his home office
Investing Articles

36% under ‘fair value’ and forecast annual earnings growth of 6%, should investors consider this FTSE 250 stock?  

This FTSE 250 firm is a leader in a growing sector and has secured several new sites to drive its…

Read more »

Portrait of a boy with the map of the world painted on his face.
Investing Articles

3 UK shares that have recently become takeover targets

Mark Hartley examines why these three UK shares have become takeover targets and could be bought out by rivals in…

Read more »