I follow the Lloyds Bank (LSE:LLOY) share price closely as I’ve been a shareholder for several years. It’s a frustrating stock to own because it rarely reaches the heights that analysts (and myself) think it should. Still below 52p, are Lloyds shares a bargain?
Getting results
During the 2022 results season for banks, Lloyds share price took a bit of a battering. Before Barclays kicked things off on 15 February, Lloyds shares were trading at 53.79p. A week later — on the day that Lloyds released its own results — they closed at 49.72p. Since then they have recovered a little. But they are still 22% lower than they were five years ago.
To be honest, I was a little disappointed with the 2022 results. Although net income increased by 14%, from £15.8bn in 2022 to £18.0bn in 2023, profit before tax remained unchanged at £6.9bn. The movement in the provision for bad loans took £1.5bn off last year’s profit. In 2021, an improving situation resulted in a £1.4bn credit (income) being booked.
But, the bank remains hugely cash generative. In 2022, £22bn was earned from its operating activities.
Looking forward
However, this is all history. It’s the future that matters.
Lloyds is heavily exposed to the UK economy, with nearly all of its income being generated here. Other banks have a more global customer base, located in economies that are likely to grow far quicker. This is one of the reasons why Lloyds is forecasting a reduction this year in its return on capital employed (ROCE).
More positively, the directors have increased the dividend by 20%. The 2022 payout will now be 2.40p per share, giving a current yield slightly above the FTSE 100 average.
Despite my frustration, I’m going to stick with my Lloyds shares. It now seems likely that if the UK falls into recession this year, it’ll be a relatively short and shallow one. Lloyds should then start to see a reduction in its bad debt risk.
However, the biggest impact on the bank’s profitability is the UK base rate.
Interest rates are probably not too far away from their peak. The Bank of England’s central forecast is for the base rate to climb to 4.5% by mid-2023, and then fall to 3.25% in three years’ time. Lloyds is expecting a net interest margin (the difference between the interest rate charged on loans and that paid on deposits) of 3.05% in 2023, up from 2.94% in 2022 and 2.54% in 2021.
I therefore see upside to the current Lloyds share price.
I think 60p is a realistic short-term target. At the end of 2019, long before Covid was talked about and prior to Russia invading Ukraine, the share price was 64p. And, at that time, the base rate was only 0.75%!
