The stock market crash has produced a number of bargains, yet the Lloyds (LSE: LLOY) share price may be one of the greatest. The bank stock has fallen by over 50% year-to-date, and its recovery from lows of around 27p has been limited. But with the economy starting to restart, is it now the perfect time to buy?
The Lloyds share price is low for a reason
Bank stocks have been heavily affected by the pandemic, and Lloyds is no exception. With the economy at a standstill, the Bank of England has taken drastic measures to ensure a V-shaped recovery. This has included cutting interest rates twice, so that the current UK base rate stands at just 0.1%. While this can increase the amount of borrowing, it can also damage the profitability of banks. An increasing number of loan defaults has also added to the misery of the financial sector.
Lloyds has also been negatively affected by the collapse in the housing market. Lloyds is the UK’s biggest mortgage provider, and this means that revenue from this area has fallen drastically.
A culmination of these factors has significantly reduced profits and resulted in poor earnings in the first quarter. In fact, profits after tax were £480m, which is also a 60% decline compared to last year. These poor results subsequently saw five consecutive days of losses for the Lloyds share price. But with half-year results fast approaching, any improvement on this could be met with sharp gains.
What does the future hold?
The major news recently was that CEO António Horta-Osório will be stepping down from his role after nearly 10 years. While he has managed to exit the government bail-out and repair the bank’s finances, profits have stayed flat over the past couple of years. So I believe a change in leadership could provide the bank with new ideas and a more profitable future.
The dividend also seems like a short-term loss. Like the majority of other bank stocks, Lloyds cut its dividend to help preserve cash in preparation for loan defaults. Yet the current consensus would see its return in 2021 at a yield of approximately 6%. As such, with the Lloyds share price so cheap at the moment, this could be an ideal time to buy.
The bank stock I prefer
yet while I would happily buy the Lloyds share price, and I think there is significant upside potential, I prefer Barclays as a bank stock. Why? Firstly, Barclays benefits from a more diversified business model that includes an investment banking operation. This investment bank sector has been largely unaffected by loan defaults and low interest rates. As such, it has been able to drive profits for the bank. This resulted in stronger first-quarter earnings than at Lloyds and slightly more momentum on its share price. I’d choose Barclays over Lloyds in this case.
Stuart Blair owns shares in Barclays. The Motley Fool UK has recommended Barclays 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.