Will Lloyds shares recover in 2023?

Could Lloyds shares come roaring back in 2023 after a disappointing 2022? Christopher Ruane considers the possibilities — and decides not to invest.

| 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.

Man putting his card into an ATM machine while his son sits in a stroller beside him.

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.

2022 has not been a rewarding year for shareholders in banking giant Lloyds (LSE: LLOY). Its shares have dipped 8% since the start of the year.

As the shares offer a 4.6% dividend yield, shareholders have had the blow of a declining share price softened. Nonetheless, if I had bought Lloyds shares at the start of January, I would be in the red.

Longer-term, the picture is also bleak. Lloyds has seen its share price fall 31% in the past five years.

Yet this is the country’s leading mortgage lender, it is hugely profitable and trades on a price-to-earnings ratio in single digits. So should I add Lloyds shares to my portfolio now in the hope of a recovery in 2023?  

Understanding the slide

Before looking forward, it can help to look back. Why has the share price been drifting down, given the company’s impressive business performance? After all, Lloyds reported a profit after tax of £4bn for the first nine months of this year alone.

One reason is the risk a worsening economy poses for a bank that is so dependent on lending to UK borrowers. While that £4bn profit is vast, it is still 26% lower than the equivalent figure in the same period last year. If the economy worsens, profits could shrink further. Normally, if a recession combines with falling house prices, as we are seeing now, loan defaults increase. That would hurt profitability at Lloyds.

The bank has reassured investors that “observed credit performance remains stable, with very modest evidence of deterioration”.

That is positive. But for Lloyds shares to recover in 2023, say to where they were five years ago, I think investors would need to feel confident that the economy was on the front foot again, with booming growth and a decline in default risk. I do not expect 2023 to shape up like that, based on how many challenges the economy currently faces.

How to value Lloyds shares

Even if the prospects are weak, could the ‘Black Horse’ bank’s shares stage a recovery simply because they currently look cheap?

It is true that their price-to-earnings (P/E) ratio of 8 is low. But the same might be said of rivals such as NatWest, where the P/E ratio is 11 – or Barclays, where it is just 5.

Investors clearly have doubts about the short- to medium-term outlook for banks with heavy UK exposure. I think those seemingly low P/E ratios are factoring in an expected decline in earnings, like we have seen at Lloyds in the first three quarters of this year. That would mean prospective valuations are not as cheap as they look when using historical data.

I therefore do not expect bargain hunters to pour in and push up the price of Lloyds shares dramatically in 2023.

I’m waiting

I like quite a lot of things about the Lloyds business, from its well-known brands to the strong position in UK mortgage lending. But I think the declining share price reflects ongoing concerns about the UK economy. Until there are more positive indicators on that front, I would not buy Lloyds shares for my portfolio.

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.

C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays Plc and Lloyds Banking Group Plc. 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

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »

Investing Articles

3 ideas to help investors aim for a million-pound Stocks & Shares ISA

The UK has a growing number of Stocks and Shares ISA millionaires, and this plan may be one of the…

Read more »

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »