Back in late 2017, I bought Lloyds (LSE: LLOY) shares for my portfolio at a share price of around 65p. At the time, the bank’s profits and dividends were on the rise, and I thought the FTSE 100 stock looked attractive from a value perspective.
It’s fair to say the shares have been a terrible investment. Lloyds’ share price has recently crashed to below 30p, meaning that my investment is now worth less than half what it was originally. Making matters worse, Lloyds has suspended its dividend, which means I’m no longer receiving income from the stock. All in all, it’s not a good result. So, what’s the best move now? Should I sell my shares? Hold on to them? Or buy more?
Why has Lloyds’ share price crashed?
To answer that question, let’s look at what has been happening in the UK. The main reason Lloyds’ shares have fallen is that the UK economy has been hit hard by the coronavirus. According to the Bank of England (BoE), we could be looking at the biggest economic slump in over 300 years.
That’s certainly not good for Lloyds, or any other UK bank for that matter. Banks’ profits are tied to the health of the economy. When the economy tanks, banks’ profits generally tank too, due to the fact that more businesses and individuals can’t repay their loans.
This is well illustrated by Lloyds’ recent first-quarter results. For the quarter ending 31 March, the bank set aside £1.4bn in impairment charges. As a result, underlying profit fell 74%.
To be fair, an economic downturn was always a risk I was aware of. I wrote about this risk numerous times. Of course, what I wasn’t expecting, was a pandemic that would shut down businesses all across the country (and world).
Another reason Lloyds’ shares have crashed is interest rates. The higher interest rates are, the more money banks can earn from the spread between borrowing and lending rates. With the BoE recently cutting rates to 0.1% – the lowest level ever – it’s not good for Lloyds.
Finally, the fact that Lloyds has suspended its dividend has probably also contributed to the share price fall. I always knew the dividend wasn’t guaranteed. What I wasn’t expecting, however, was regulators forcing UK banks to suspend their dividends in the wake of a pandemic.
What’s the best move now?
In light of these reasons why Lloyds’ share price has plummeted, what should I do about my shares now?
Given that I’m a long-term investor, I’m going to hold on to my LLOY shares for now.
The situation could get worse before it gets better. Recently, Lloyds said: “The impact of lower rates, lower levels of activity and higher impairment on the Group’s business will continue into the second quarter.” So there’s a chance the shares could fall further.
Yet I’m not convinced that selling now and locking in a large loss is the right move.
Lloyds says it has confidence in the resilience of its business model and the strength of its balance sheet. And the BoE has said that UK banks are robust enough to keep lending even if the economy shrinks by 30%.
Therefore, I expect Lloyds to survive this crisis. For this reason, I’m going to hold. When the economic outlook improves, I think Lloyds’ share price should rebound.
