Lloyds’ (LSE: LLOY) share price has been stuck at rock-bottom levels for a long time now. A decade ago, it was near 70p. Today, it’s still under 50p.
Will the shares ever go up? Here are my thoughts.
Stuck below £1
There are a number of reasons Lloyds shares are stuck below £1. The most obvious is the strength (or weakness) of the UK economy.
You see, as a domestically-focused bank, Lloyds shares are seen as a ‘proxy’ for the British economy. And right now, the economy isn’t exactly firing on all cylinders.
Recently, the International Monetary Fund (IMF) said it expects UK GDP growth of just 0.4% this year. That would represent the second-lowest level of growth across the G7.
One thing the UK needs to do on this front is get inflation down. As the IMF says: “Bringing down inflation is a prerequisite for lasting stability and growth”.
Linked to the economy is uncertainty over loan defaults in the housing market. This is also having an influence on Lloyds shares as the bank is Britain’s largest lender (more than half its loans are mortgages).
It’s no secret that a lot of property owners are struggling right now due to the recent spike in interest rates. So I think we can expect loan defaults to rise. For Q1, Lloyds registered an impairment charge of £246m, up from £178m a year earlier. Defaults hit profits which, in turn, impact a company’s share price.
Another major factor keeping Lloyds shares depressed is sentiment towards UK stocks. Right now, a lot of international investors are avoiding British shares as they view the UK as a bit of a basket case. Brexit uncertainty, political turbulence and a lack of economic growth are some of the main reasons why.
Then there’s the threat of financial technology. Today, the banking industry is experiencing a huge amount of disruption. New digital banks like Revolut and Monzo are capturing market share from the big banks, as are innovative payments companies such as Wise and Apple.
Can the share price recover?
In light of all this, for Lloyds shares to go up meaningfully, I think we need to see several things happen.
First, we need to see UK economic conditions improve. I do believe economic growth will pick up in the years ahead. However, it may be slow progress. The IMF currently forecasts growth of just 1.1% for 2024.
Second, we need conditions in the mortgage market to stabilise. Lloyds shares are unlikely to rise if the bank is facing a wave of defaults. I think the market will stabilise at some stage in the near future – people just need time to get used to higher mortgage rates.
Third, we need to see sentiment towards UK shares improve (this could happen if economic growth picks up).
Finally, Lloyds needs to show it can compete in today’s digital age, where consumers want convenient, efficient, low-cost banking services. It’s worth noting that Lloyds is committed to FinTech collaboration, so I think it’s on the right track here.
My take
Putting all this together, there are reasons to be optimistic in relation to Lloyds’ share price.
That said, I’m not super excited about the stock, if I’m honest. I think there are much better UK shares to buy today.
