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Is the Lloyds share price too cheap for 2021?

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Scene depicting the City of London, home of the FTSE 100
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The Lloyds (LSE: LLOY) share price fell 42% in 2020 and ended the year at just over 36p. This fall was caused by the pandemic, including the damage to the UK economy and the base rate being lowered to 0.1%. Fears of a negative interest rate being introduced put a further strain on the share price. And aside from the pandemic, the potential impacts of Brexit also impacted the bank stock, especially due to reports that the Brexit deal has been ineffective for the financial industry. So, lots of bad news. But with the Lloyds share price still at such a depressed price, would I buy it in 2021?

Impacts of Brexit

Although a Brexit deal has been agreed, Boris Johnson has still acknowledged the deal’s omissions regarding financial services. UK financial firms will therefore lose all passporting rights. This means they can no longer operate in other EEA countries without a licence to operate there. Severe ramifications are expected to follow, including Lloyds having to close down the bank accounts of many Britons living abroad in Europe.

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Although British regulators have indicated that some EU organisations will be able to extend their UK operations for a temporary period, no such assurance has been granted by the EU. This means that future co-operation is likely to be based on ‘equivalence’. This means that non-EU banks would still be granted market access, albeit to a lesser extent that under the previous regime. This has not yet been agreed though, and no progress on agreements could cause the Lloyds share price to fall further.

Further considerations

As a UK-focused bank, Lloyds is also very susceptible to downturns in the UK economy. Potential further national lockdowns on the horizon, alongside the current tier system, are therefore risks worth considering.

Even so, at under 40p, these risks seem to have been factored in to the Lloyds share price. Indeed, there are a number of other considerations that could lead to big gains in 2021. These include the potential return of the dividend, after the Bank of England granted permission. Although banks need to be prudent with dividend payments, and large dividend yields are unlikely right now, it’s still a major positive for Lloyds.

The rollout of vaccines is also expected to boost the economy. I think this will lead to subsequent share price gains for Lloyds.

Is the Lloyds share price too cheap?

Today, the Lloyds share price reflects the current uncertainties, including the impacts of Brexit and the pandemic. Short-term volatility therefore seems to be the likely result, and it’s impossible to tell which way it will go.

For the long term, I’m more confident in this bank stock, however. It has shown prudence throughout the pandemic and should end its full year in a fairly strong financial position. As the UK economy starts to recover, I believe that this will be reflected in the Lloyds share price. As such, it’s a long-term buy for me!

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Stuart Blair 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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