It’s been a rare treat to see the Lloyds Banking Group (LSE: LLOY) share price climbing 40% in the past 12 months.
But is that it for 2024 now? And is the value that we’ve been waiting for for years finally out? I think the answer is no on both counts. And I’m not selling.
The bank sector is not out of the woods yet, though. There is still danger ahead.
Finance risk
I think there’s one thing that could help keep the Lloyds share price revival going to the end of the year. And that’s impairment charges, the cash set aside to help cover bad debt risk and things like that.
To be specific, it’s falling. With first-half results, posted in July, we saw an underlying impairment charge of £101m.
Seen against a statutory profit after tax of £2.4bn, that doesn’t seem like a lot. More importantly, it’s down from £662m at the same stage last year.
That’s even though we’ve only had one small interest rate cut from the Bank of England so far. But it does suggest that confidence is strong on the future easing of the burden on mortgage borrowers.
Two sides
There is, however, another side to that particular coin. Lloyds makes a fair bit of its money as the UK’s largest mortgage lender.
So, falling rates might reduce the bad debt risk. But it also lowers the potential for net lending profits. At the interim stage, we had a 13% drop in net interest income, and that’s a concern.
How much further it might move could have an effect on Lloyds year-end position, and it might not be a positive effect.
Lloyds’ historical motor insurance business is under investigation, which affected the first half. But there were no new charges at H1 time. We should have an update from the FCA in September, and that could give the Lloyds share price a few jitters.
Valuation, valuation
Still, for me, looking at Lloyds through the long-term goggles that I’ve worn for my entire investing career, it all comes down to one thing. And that’s valuation.
We should always treat analyst forecasts with caution. But I see a forecast price-to-earnings (P/E) ratio of under 10 for this year, dropping as low as seven by 2026, as leaving plenty of room for error.
It’s been lower in recent years, but that just makes me wonder why the market couldn’t see it then for the anomaly that I was convinced it was.
And seven is still only about half the FTSE 100‘s long-term average P/E. I’ll happily admit that the risk still facing the country’s banks means they probably should be valued lower than average right now.
Next few months
But for long-term investors, shouldn’t we be thinking about how Lloyds’ earnings are likely to go in the next 10 years and more, not the next few months?
On that basis, and on how I expect the market to treat short-term issues, I reckon the Lloyds share price could go anywhere by the end of the year. But I think it deserves to be higher, and could rise further.
Oh, and I haven’t even mentioned the foward dividend yield, at 5%.
