When I think about Lloyds (LSE: LLOY), I tend to think about its fairly undramatic recent share price performance.
In the past year, for example, it has moved up 6%. But since a low point in 2020, the Lloyds share price has doubled. That is an impressive rate of return for investors who got in back then.
Things may look bad for banks now but, arguably, they looked much worse in 2020 – and Lloyds has performed strongly since then.
So could now be the time to add it to my portfolio?
Hard times
First I think it is helpful to understand why the shares have performed strongly over the past three years.
In the depths of 2020, the outlook for banking was very unclear. With the economy shut down in parts, people staying at home and no news yet about a way out of the pandemic, it was hard to assess how likely loan defaults would be.
That year, Lloyds ended up making a profit of £1.4bn after tax. That is a lot of money, but is less than a third of what it achieved last year.
As the economy recovered, banking shares such as Lloyds also did well in anticipation of a return to normality.
Fast forward to 2023
What about now? Recent banking crises have hurt sentiment towards the sector, following the implosion of Silicon Valley Bank. So if the outlook for banking becomes clearer in a positive way, could that also drive shares like Lloyds up over the next few years?
In principle I think it could. Last year, Lloyds saw its profits fall. Like other banks, it has been increasing provision for bad loans. But it remains hugely profitable and sells on a low price-to-earnings ratio of under 7.
If the economy picks up speed and housing prices stay firm, I think the Lloyds share price could perform well from here. It has strong brands, deep experience and a large customer base. I think all of those are positive elements of the investment case.
Uncertain outlook
However, I am not planning to add the bank back into my portfolio any time soon. In fact, right now, I no longer own shares in any bank.
While I see possible drivers for higher share valuations, I think the risks in the banking sector overall remain real and substantial at the moment.
When it comes to banking, customer confidence is critical. That has been shaken by the banking crises in the US and Switzerland. On top of that, the economy both in the UK and in many other developed economies remains fragile.
Last year already saw post-tax profits for the Black Horse fall around 6%. Interest rates have increased and could get higher from here. There are signs of a slowdown at least in some corners of the housing market.
Economic growth is sluggish or non-existent, something that could continue in the short- to medium-term. There is also still a risk that we will enter a recession.
All of those factors could lead to higher default rates on loans. As Lloyds is the country’s biggest mortgage lender, that could hurt profits – and its share price.
