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Lloyds shares are up 11% in five days. Here’s what I’d do next…

It’s far from easy being a bank during the worst economic downturn in 300 years, as I’m sure the bosses of Lloyds Banking Group (LSE: LLOY) know full well. With unemployment rising and no sign of the virus abating, British banks have set aside tens of billions of pounds in loan-loss reserves. That’s why Lloyds shares are in the doldrums.

Lloyds shares have bounced back

As I wrote this late on Wednesday, Lloyds shares traded at 28.18p, almost unchanged from Tuesday’s close. This leaves them almost 44% down over the past 12 months. Hardly surprising, given the devastation Covid-19 is wreaking on UK businesses. What’s more, Lloyds shares are down almost two-thirds (61.7%) from their 52-week high of 73.66p, hit on 13 December last year.

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In short, it’s been a brutal year for Lloyds shareholders (and for its staff, most of whom own shares in their employer). Now for the good news: Lloyds shares cratered at 25.43p on 31 July and are up 10.8% in five days. But that’s scant relief, given the steep drops of 2019/20.

Lloyds is still a £20bn force in banking

Despite the obliteration of the Lloyds share price, there are still arguments for owning shares in this bombed-out bank. For a start, how much lower can Lloyds shares go? Once they were worth several pounds each, but now they lurk below 30p.

For less than the price of a bag of crisps, you can buy part-ownership of a £19.9bn business that has been around since 1695. What’s more, Lloyds owns several well-known, household-name brands, such as Lloyds Bank, Halifax, Bank of Scotland and Scottish Widows.

Lloyds still faces multiple headwinds

In its recent half-year results, it unveiled loan-loss provisions of £3.8bn for six months, pushing the bank to a huge loss. What’s more, with furlough support ending and unemployment climbing, there will be many more loan defaults to come. The total for 2020 could easily exceed £5.5bn.

Also, falling interest rates trimmed the bank’s net interest margin down to 2.4% in the second quarter. Likewise, the hiatus in the UK housing market has reduced mortgage lending, where Lloyds is the UK’s #1.

Lloyds shares are still too cheap

Give these headwinds, it’s no wonder that Lloyds shares have done terribly lately. But the bank has net tangible assets of 60p a share, more than double today’s share price. In other words, when you buy £1 of Lloyds shares, you get over £2 of assets.

Right now, it’s impossible to value the shares using conventional measures. That’s because earnings per share and dividends have both evaporated. But a discount of 53% to net asset value sounds tempting to me. Hence, I’d keep buying Lloyds as a recovery play and hold them for a future stream of juicy dividends.

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Cliffdarcy 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.

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