The Lloyds Banking Group (LSE: LLOY) share price has been trading at shockingly-cheap levels for ages but, unfortunately, there’s a very good reason for that. The news just gets worse and worse for the UK banking sector.
The Lloyds share price is down almost 8% this morning after reporting a 16% drop in first-half net income to £7.4bn.
You don’t need me to tell you the main reason – the banks have been on the frontline of the Covid-19 pandemic. Lloyds had to make a large provision for bad loans, as businesses and consumers suffer. In this period last year, the FTSE 100 firm posted a profit of £2.9bn. That didn’t impress investors much then.
Today, Lloyds revealed an overall loss before tax of £602m, so the stock market was hardly going to be delighted. This has sent the share price down to 26p. Its stock has now fallen by half in the last six months.
Stock market crash hits hard
In normal times I’d be rushing to buy at this dirt-cheap price, but as you won’t need reminding, these are far from normal times.
Lloyds pays no dividend for starters. Although the government has indicated it may allow banks to resume payments shortly, you have to wonder whether they’ll be able to do so. Payments won’t restart until 2021, at the earliest.
Dividends have been the main reason to buy banking stocks lately, given the poor share price performance. Despite this, investors could still take a position in Lloyds now in the hope of benefiting from a share price boost when payouts finally resume.
It certainly makes sense to pick up top FTSE 100 stocks like Lloyds when their share prices are down and investors are turning their backs. If you plan to hold for the long term, by which I mean five years and ideally 10, or 20 years, you should eventually reap the benefit.
This is where private investors have an advantage over professionals. You can afford to be patient, with nobody to badger you if the recovery takes longer than expected.
The Lloyds share price could recover
Clearly, it’ll take time as Covid-19 is far from over. We can expect further bad debts when government furlough schemes end in October, and zombie jobs and companies are exposed to the fastest economic contraction in history.
Worse, record-low interest rates are squeezing net lending margins and profitability, although the stamp duty holiday might boost mortgage lending. Consumer borrowing and insurance sales should pick up as the lockdown eases, so the next set of results may be more positive.
The Lloyds share price should benefit from the bank’s relatively low cost-to-income ratio, and its shift into digital banking is showing signs of promise. Trading at just over eight times earnings, this may one day prove a bargain.
At least something good has come out of the financial crisis. Banks are in a much stronger financial position as a result. They need to be right now.
So what’s the one condition I’d take into account before buying this particular banking stock? Giving it time. The Lloyds share price should recover one day. I’d say only buy if you’re prepared for the long haul and don’t expect a quick surge.
