Up 25% in weeks! Has the Lloyds share price entered a new phase?

Christopher Ruane examines why the Lloyds share price has surged by a quarter in a matter of weeks — and whether he should invest in the black horse bank.

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For many years, shares in Lloyds (LSE: LLOY) have sold for pennies each. While the bank has a huge customer base in the UK and a market capitalisation of £33bn, the Lloyds share price has looked lacklustre. Over the past five years it has sunk 17%.

Still, things might be looking up. In just a few weeks since the first half of February, the shares have moved up 25%. Despite that increase, they trade at a discount to book value and on a price-to-earnings ratio of just seven.

That makes the bank look cheap by some measures. Indeed, that could explain why investors have been bidding its shares up.

Could Lloyds have turned the corner when it comes to investor perception?

Concerns about the shares

With its strong market position and large profits (£5.5bn after tax last year), it may seem odd that the Lloyds share price has been depressed for as long as it has.

But there have been a few concerns dogging the shares for years.

One is a general investor nervousness about whether a weak economy could push up loan default rates and hurt profits. That has cast a shadow over the banking sector in the UK and beyond. Lloyds is not alone in having struggled to combat this narrative.

Another concern more specific to the bank is its strong UK focus. That ties its performance more closely to the UK economy as a whole than is the case for rivals with greater international diversification, like HSBC and Standard Chartered. If the UK economy struggles, that is likely to affect performance at the country’s leading mortgage lender, Lloyds.

Another concern – and one that led me to sell my Lloyds shares previously – was the bank’s unenthusiastic approach to dividends.

Yes, the dividend grew 15% last year and yes, the yield is over 5% even after the recent surge in the share price. Nonetheless, despite massive cash flows, the bank has still not restored its dividend to where it stood before the pandemic.

Come to that, it is also nowhere near where it used to be before the 2008 financial crisis!

Strong momentum

Given those concerns, what has been driving up the price of the shares?

I think the key reason is that the City now feels more relaxed about the outlook for banks after last month’s slew of annual results.

With the economy weak but not terrible, concerns about default rates are fading.

That has helped boost the banking sector generally, not only Lloyds. Rival NatWest, for example, has seen its share price rise by 25% since the first half of last month – just like Lloyds!

Strong profitability has put the focus back on the underlying attractions of such shares. Lloyds has powerful brands, a massive customer base and a proven business model. It continues to generate large profits. Indeed, last year saw its statutory profit after tax grow 41%.

I think the share price looks potentially cheap, but am not convinced we are out of the woods economically yet.

For now, I continue to avoid bank shares and will not be buying back into Lloyds for now.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

HSBC Holdings is an advertising partner of The Ascent, a Motley Fool company. C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings, Lloyds Banking Group Plc, and Standard Chartered Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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