Lloyds (LSE: LLOY) shares crashed due to the Covid-19 pandemic. However, for some time now it seems like this giant banking firm is poised for a strong rebound. After Lloyds shares have jumped over 30% since the beginning of the month, I’ve been taking a closer look at the bank. In my view, the Covid-19 vaccine might give investors the lift they have been waiting for, and banking firms like Lloyds will use their capital to help investors achieve that goal.
New flow of capital
One of the concerns of the Covid-19 pandemic was that it might completely stop the flow of capital. Normally in times of economic crisis, banks tend to tighten lending for both personal and business loans. More than that, the pandemic has generated a major instability in global capital markets, which deeply affected banking firms. But even when taking the Covid-19 pandemic out of the equation, Lloyds is facing some serious problems. First, the global near-zero interest rate policy of central banks has been a significant problem for banks in the past decade. Then, Brexit is still a huge concern for the UK market, in particular financial institutions. And finally, Lloyds, which is the biggest mortgage lender in the UK, had to deal with a major drop in revenues due to the stand-off in the UK housing market.
So, when taking all the factors above into consideration, the fact that Lloyds shares dropped to all-time low levels in September was not a big surprise. But at the same time, the economy is cyclical and the recession phase is part of that cycle. After all, the idea of investing is buying shares at cheap levels and sell at higher prices.
Lloyds share price boost
Lloyds banking is not a high growth start-up company. It is a strong, well-capitalised banking firm that has survived since 1765. Meaning, it has to maintain its value and strength. This typically happens when the economy is doing well or at least not in a crisis mode. Looking at the factors above, I think the Bank of England is likely to raise interest rates in the next year given the fact that the economic stimulus package might cause inflation. More importantly, Lloyds has returned to profit in Q3, which can be largely attributed to the recovery of the UK housing market. Consequently, Lloyds’ share price spiked from 24p to nearly 37p with strong bullish momentum during the last month.
As for Brexit, it is still a concern…
Lloyds shares — the bottom line
All in all, Lloyds shares currently offer an attractive long-term investment opportunity. The company’s price-to-earnings ratio for the trailing 12 months currently stands at 37, after falling from levels of 70-80 just a month ago. This figure and strong Q3 earnings could be a catalyst for the Lloyds share price to keep rising.
Obviously, there’s still a downside risk, and as such, I wouldn’t invest a large proportion of my portfolio in Lloyds shares. With that in mind, there’s a hype around Lloyds shares at the moment. This gives me the reason to see an upside of around %15–%20 in the next few months. For me, a portfolio allocation of %10–%15 to Lloyds shares is a smart decision right now.
Tom Chen has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.