Over the past five years, the Lloyds (LSE:LLOY) share price has fluctuated between 24p and 67p.
Of all the stocks I own, it’s the one that frustrates me the most, as I think the bank is undervalued. And yet the share price remains stubbornly close to 50p.
I’m not alone in thinking the stock should be higher.
Barclays, RBC Capital Markets, and Berenberg all rate Lloyds as a ‘buy’, and have price targets of 75p, 70p, and 58p for the stock, respectively.
But in my lifetime, I don’t think the share price will ever reach the level it did before the 2007/08 economic crisis.
In February 2007, the bank’s shares changed hands for nearly £3. But the October 2008 merger with loss-making HBOS, and the regulatory requirement to raise additional capital, meant it needed a cash injection of £17bn. As a consequence, the number of shares in issue increased nearly 11 times.
With more stock in circulation, last year’s earnings per share was only 7.3p, compared to 58.3p in 2007, even though pre-tax profit was £2.93bn higher.
But the bank’s performance in 2022 was much better than in 2019, when its share price was last over 60p. Net interest income was 37% higher and earnings were 57% more. I therefore fail to see why the stock isn’t — at least — 10p higher.
Here we go again
This week, the bank released its results for the first quarter of 2023.
Even though it reported a profit before tax of £2.26bn — which beat the £1.95bn consensus forecast of analysts — its shares fell.
The directors presented a cautiously optimistic outlook, but decided to increase the provision for bad loans by £243m.
Lloyds’ financial performance is closely tied to the UK economy. With a 20% market share, it’s the country’s largest mortgage lender. The domestic economy will probably avoid a technical recession this year and, according to the International Monetary Fund, will grow by 1% in 2024 and 2.2% in 2025.
But other regions are growing faster, which means banks more heavily exposed to Asia, for example, may see their earnings rise quicker. HSBC saw its pre-tax profit increase from $5.05bn in Q4 2022 to $12.89bn in Q1 2023. Excluding exceptional gains of $3.64bn, this is a much better performance than Lloyds.
However, concerns that investors have about the health of the banking industry resurfaced this week with First Republic Bank having to be rescued by JP Morgan.
Reasons to be optimistic
But there’s some evidence that the housing market may have turned the corner. Nationwide‘s latest monthly survey of house prices recorded the first increase for seven months.
This should translate into increased demand for mortgages, despite the Bank of England expecting to increase interest rates further. But a higher base rate will also help boost Lloyds’ interest income.
I think Lloyds’ stock will eventually climb towards 60p. But it may take some time. The UK economy is still fragile and it will be a couple of years before growth returns to historical levels.
In the meantime, although I’m sure the stock will continue to frustrate me, I’ll take some comfort from the healthy level of dividend income provided. It currently yields 5.6%, which is above the FTSE 100 average. It’s also more than could be earned from depositing cash into a Lloyds savings account.
