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Why I believe the Lloyds share price could soon return to 90p

Let me confess upfront — I’ve been expecting the Lloyds Banking Group (LSE: LLOY) share price to soon return to 90p for a few years now.

Lloyds shares are on a P/E of only eight, with forecast dividend yields of 5.5%, and rising. Dividends would be covered more than twice by earnings and, on the face of it, I’d say that looks like a bargain valuation.

But when the market pushes a whole sector down you have to pay attention, and a low valuation is not necessarily an incorrect one. So what reasons are there for a bearish stance on Lloyds?

The elephant

Fellow Fool Royston Wild explains what clearly seems to be the biggest threat, a no-deal Brexit. Should that come to pass, much of the country will have a lot more to worry about than the price of Lloyds shares. We could be facing critical shortages, and would very likely experience a lengthy period of worsening economic gloom.

While our departure from the EU was looking like happening by the planned date, or soon after, I thought the lifting of that millstone could well trigger an uprating of the financial sector. But that was on the assumption that we’d actually get a deal, and if we don’t, then the financial underpinning of the economy will surely suffer — the banks, that is.

But Royston was writing a week ago, and that’s a long time. Since then, Prime Minister Theresa May has done the unthinkable and started talking to the Labour Party to try to reach an agreement.

Delays

And as she’s off trying to get another delay, it seems the heads of Europe are talking about a flexible extension of up to a year. That sounds very sensible to me — I’d much prefer Brexit to be done right than done quick.

On the upside for Lloyds, if there’s a significant delay then that could drag us back from the brink of a no-deal disaster. On the downside, further delays could turn soon into maybe not quite so soon yet.

There are plenty of other difficulties facing Lloyds and the other big banks. As Royston also points out, there’s increasing pressure in the mortgage market, and with Lloyds now pretty much refocused as a UK retail operation, it’s susceptible to that.

But I think the share price has always taken into account those easily-seen uncertainties, and then some — current share valuations look far more discounted to me than is justified on such grounds.

Turning?

I also see sentiment changing. Lloyds shares are in a bit of a rally right now, having doubled the FTSE 100’s performance since the start of the New Year — Lloyds shares are up 20% compared to the index’s 10% gain. I can’t help feeling that suggests investors are coming to realise their fears are overblown and the shares are oversold.

With the risk of a no-deal Brexit looking like it might be pushed back, again, I really can see Lloyds shares regaining 90p, and then more. But depending on the length of our next delay (assuming we get one), we might have to be flexible over the value of soon.

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Alan Oscroft owns shares of Lloyds Banking Group. The Motley Fool UK has no position in any of the shares mentioned. 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.