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Why I’d invest £1,000 in the Lloyds share price today

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Lloyds Banking Group (LSE: LLOY) was one of the first big names to suspend its dividend in the stock market crash. And if that’s not enough, the Lloyds share price has crashed by 45% since the Covid-19 pandemic struck.

The FTSE 100 hit the depths of 4,899 points in March. Since then, the index has come back with an 18% recovery. And some top shares have made recent gains too. But Lloyds is not one of them.

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While other big FTSE 100 stocks have echoed the index’s tentative rebound, the Lloyds share price has been a bit volatile but generally flat since the crash.

Depressing track record

Lloyds shareholders are no strangers to the price of their shares bumping along the bottom for months on end, even years. Previous bottoms, though, have not been anywhere near as deep as this one. So why is Lloyds one of the last to recover from a downturn, and why does it take so long?

Lloyds isn’t alone in this. Royal Bank of Scotland has pretty much followed the same trajectory as the Lloyds share price. Barclays has fared a little better. The Barclays share price has bounced back 40% since it hit rock bottom in the FTSE 100 crash. HSBC Holdings shareholders have suffered even less, as their shares haven’t fallen anywhere near as far as the other FTSE 100 high street banks.

Lloyds share price uncertainty

Institutional investors fear uncertainty more than just about anything. Right now, that uncertainty is all about the levels of bad debts Lloyds could face as the coronavirus crisis unfolds. And how the Lloyds balance sheet will hold up. With the dividend suspended, those fears could weigh on the Lloyds share price for some time yet.

Thankfully, these days we do at least have something to go on. The Bank of England conducts stress tests at regular intervals, and Lloyds came comfortably through the last one in December. Under the pressure of that test, Lloyds made it through with a CET1 ratio of 8.5% and a leverage ratio of 4.3%. That’s against hurdle rates of 7.5% and 3.47% respectively.

The test conditions were severe, but were they enough to support the share price today?

Worse in reality?

The stress test scenario imagined a 4.7% fall in GDP in the first year, with unemployment rising to a peak of 9.2% in the second year. It also modelled a 33% fall in house prices, with commercial property values falling 41%, over a three year-period. That would hurt the Lloyds share price, but we should avoid another banking crisis.

While the UK is on lockdown and short-term productivity is set to be hammered, I think the big difference is in the timescale. The Covid-19 crash could be more severe in the very short term. But I can’t see it exceeding the BoE’s stress tests over the next three years. And I remind myself that Lloyds was significantly ahead of those hurdle rates.

I can picture the share price remaining depressed for quite some time, and I’m not seeing any quick profits for those who buy now. But I do think Lloyds, and the other banks, will come through this and will prove to be good long-term buys.

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Alan Oscroft owns shares of Lloyds Banking Group. The Motley Fool UK has recommended Barclays, HSBC Holdings, and 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.

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