Lloyds Banking (LSE:LLOY) shares are arguably one of the most popular investments in the UK. The bank stock enjoys an average daily trading volume of well over 200m shares. And it’s often featured on Hargreaves Lansdown’s most popular shares list.
Yet popularity doesn’t necessarily result in favourable investment returns. In fact, it’s often quite the opposite.
Weak performance
Over the last five years, the performance of this bank stock has been pretty appalling. Like many businesses, Lloyds saw its market capitalisation suffer significantly following the 2020 pandemic. And, unfortunately, it has yet to make a comeback.
While the valuation has made some recovery progress, Lloyds shares are still down almost 30% since June 2018. As such, a £1,000 investment currently sits close to just £700. Of course, this only considers the share price movement. So what happens when dividends are added to the equation?
Back in mid-2018, £1,000 would have fetched roughly 1,600 Lloyds shares. And since then, the bank has paid out approximately 8.23p a share in dividends. That translates to around £131.68. Sadly, that’s not enough to offset the decline in the share price, bringing the total loss to around -16.8%.
By comparison, the total return of the FTSE 100 over the same period is closer to 26.9%, leaving the bank firmly in the dust.
A brighter future?
Given how terrible an investment Lloyds has been over the last five years, it begs the question why is the stock so popular? There are undoubtedly many contributing factors. However, it’s likely that the sheer size and maturity of the business gives investors a false sense of security.
Does this mean investing in Lloyds shares today is a bad idea? Not necessarily.
It’s essential to understand precisely how retail banks make their money. The concept is pretty simple. Accept deposits, lend out some of this money to individuals and businesses, and then collect interest payments to turn a profit.
The latter part of this business model has been particularly challenging for over a decade. Why? Because interest rates have been so low, due to a lack of inflation. Today, that’s obviously no longer the case. And, subsequently, the lending environment has improved drastically.
With that in mind, it’s quite encouraging to see that in the bank’s latest quarterly earnings report, net interest income jumped 21%, with total profit leaping 44% year-on-year. And as the Bank of England continues to hike interest rates, Lloyds’ bottom line will likely continue to benefit, hopefully putting its shares on the path to better returns.
Time to buy?
Historical performance is often a poor indicator of future returns. And now that the bank’s operating environment has improved drastically, I’m cautiously optimistic about the future performance of Lloyds shares. Having said that, I’m personally not tempted.
As inflation gets under control, interest rates will likely eventually be cut. And while I doubt they will return to the near-zero rates we’ve enjoyed since the 2008 financial crisis, the reversal of rate hikes will have a tangible impact on Lloyds’ bottom line.
Therefore, I think investors may want to consider looking for better investment opportunities elsewhere.
