The Lloyds (LSE: LLOY) share price has plunged in value this year. Investor sentiment towards the lender has crumbled as the coronavirus crisis has wreaked havoc on the UK economy. As one of the largest banks in the country, the crisis may have a significant impact on Lloyds.
Indeed, the company has already announced it may have to write off billions of pounds worth of loans as businesses across the country collapse. However, the booming housing market could offset some of this downturn. As such, rising home prices may be good news for the Lloyds share price.
Good news for the Lloyds share price
At the end of July, Lloyds made a stunning announcement. The bank said that it plans to lose between £4.5bn and £5.5bn this year due to bad loans. This projection was based on the group’s UK economic forecasts for the rest of 2020.
These projections suggested UK GDP will fall 10%, unemployment will hit 7.2%, and house prices will fall by 6% this year. In its worst-case scenario, Lloyds projected a double-digit decline in property prices for the year.
As the largest mortgage provider in the country, falling property prices may have a more considerable impact on Lloyds than any other bank. Luckily, the property market seems to be holding up quite well.
This could be good news for the Lloyds share price. Buoyed by the chancellor’s stamp duty holiday, low-interest rates and pent-up demand, home prices in the UK have surged over the past few weeks.
According to property portal Rightmove, the number of transactions on its platform has hit a 10-year high. Some figures suggest these factors have added as much as £30,000 to the average property price. A recent report indicated that before the lockdown, the average property in the UK cost £260,000. It’s now £290,000.
This performance suggests Lloyds’ downbeat assessment of the UK economy might have been too pessimistic. Clearly, there are risks ahead for the UK economy. Rising unemployment and a second wave of coronavirus could send property prices crashing.
Still, a better-than-expected economic performance could have a positive impact on the Lloyds share price. Investors currently seem to be considering the worst-case scenario for the bank.
The Lloyds share price is currently trading at a price-to-book (P/B) value of just 0.4. That’s compared to the UK financial sector average of 0.6. These numbers suggest the lender’s share price is undervalued by around 50%. As such, it could offer a wide margin of safety at current levels.
Therefore, if the UK economy performs better than expected over the next few months, the Lloyds share price may have the potential to produce large capital returns for investors.
What’s more, the bank has historically paid significant dividends to investors. It’s currently prevented from doing so by regulators, but this could change in the coming months. If it does, the Lloyds share price has the potential to offer a dividend yield of 8%, based on historical trends.
These numbers suggest the Lloyds share price has the potential to produce substantial total returns in the years ahead. As such, it may be worth buying as part of a well-diversified portfolio today.
Rupert Hargreaves owns no share 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.