Could the Lloyds share price crash 50% by the end of the year?

Will shares in Lloyds Banking Group plc (LON: LLOY) keep falling? Roland Head explains why he’s bullish at current levels.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

As I write, shares in Lloyds Banking Group (LSE: LLOY) are trading at about 50p. That puts the stock on less than seven times broker forecast earnings for 2019, with a dividend yield of 6.8%.

Why are the shares so cheap? The only logical explanation is that investors expect the UK economy to crash and are pricing in a big drop in profits. I can certainly see some uncertainty on the horizon. But are the shares really likely to crash 50% before Christmas? I don’t think this is likely.

Good value

In its half-year results, Lloyds reported a tangible net asset value per share of 53p. The bank said its return on tangible equity — a measure of profitability — was 11.5%. Over the full year, the bank expects this to improve to 12%.

By multiplying return on tangible equity with net asset value, we can get an idea of how much profit to expect. Based on the bank’s guidance, my sums suggest earnings of about 6.4p per share for 2019.

Given the uncertain outlook for growth, I think a safe valuation for the stock would be about eight times earnings. Using the figures above, this gives a share price of 51p. That’s pretty much where we are now.

The share price looks fair value to me at the moment, assuming profits are sustainable.

What if profits fall?

With the PPI deadline now past, the main risk I can see is that the value of Lloyds’ mortgages and loans will fall. The most likely reason for this would be an increase in bad debts. Recent economic data has highlighted slowing performance in the manufacturing and services sectors. If the UK goes into a recession and unemployment rises, then Lloyds’ UK-focused business could see rising losses from bad debts.

Indeed, we’ve already seen some signs of this. During the first half of 2019, bad debt charges rose by 27% to £579m. However, although this was a big increase, bad debts still only represent 0.26% of the bank’s £441bn loan book. That’s still quite low, by historic standards.

This is a risk worth watching. But based on what we know at the moment, I think the Lloyds share price already reflects a cautious outlook. Even if bad debt continues to rise during the second half of the year, I don’t think the increase will be big enough to justify a 50% share price crash.

Don’t panic!

In my view, if Lloyds’ share price does crash by the end of the year, the most likely reason will be a major market panic. I’d guess the most likely trigger for this would be a no-deal Brexit, perhaps combined with news that the UK is officially in recession.

I don’t know how likely this is, but the UK’s big banks are much stronger than they were in 2008/9. A major collapse therefore seems unlikely to me. If Lloyds shares crash to 25p later this year, then I would probably view it as a brilliant buying opportunity.

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.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. 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.

More on Investing Articles

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »