Lloyds (LSE: LLOY) shares plunged in the stock market crash. After this slump, the stock has fallen to a level not seen since the financial crisis.
However, this could be a good time for long-term investors to snap up a share in this banking giant at a discount price. Today, I’m going to explain why I believe this to be the case.
Lloyds shares under pressure
At the current share price of around 26p, shares in the UK’s largest mortgage lender are trading just below their financial crisis low.
But while the company is facing some significant headwinds, I think investors have overreacted here. Lloyds is far more robust than it was in 2008, and the government hasn’t bailed it out.
This gives the business more scope to benefit from the UK economic recovery in the years ahead. It can use its strong balance sheet to increase lending to consumers, or purchase growth by buying other businesses.
So, while Lloyds shares may suffer further uncertainty in the near term, I’m optimistic about the company’s long-term prospects. City analysts are expecting the group to report a 70% decline in earnings this year. No matter how you put it, that’s a substantial decline.
However, currents projections suggest the group is set to eliminate virtually all of this decline by 2021. Of course, these are only forecasts at present, but I think they show the company’s potential.
2020 will be a unique year for the business. Rising loan losses are set to be incredibly painful, and that’s the main reason why Lloyds’ income is set to fall this year.
But by 2021, Lloyds should be through the worst of the storm. Even if Covid-19 remains a threat, the company will have a better understanding of potential losses, risks, and opportunities. This will give management more scope to manage the crisis effectively.
As such, I think there’s more potential for the stock to rise from current levels than fall further. The valuation of Lloyds’ shares is also encouraging, in my opinion.
The stock is currently changing hands at a price-to-book (P/B) value of 0.4. That’s compared to the banks long-term average of one.
I think it’s highly likely the shares will return to this long-term average valuation in the long run. The valuation also provides downside protection because if it falls further, Lloyds could become a prime takeover target.
All in all, while the bank is facing some significant headwinds, I think the bank’s long-term outlook and valuation are encouraging.
Therefore, Lloyds shares look like a brilliant buy after the recent stock market crash. Unlike other companies, which may struggle to return to growth in the new normal, Lloyds’ position in the market, as well as its strong balance sheet, should help the lender quickly recover.
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.