The Lloyds (LSE: LLOY) share price has risen about 15% year-to-date. It has outperformed the broader FTSE 100 index in the same period. The UK-centric Lloyds Bank’s business might benefit in the coming months when all the economy’s sectors open.
Here, I further analyse this FTSE 100 stock to understand its long-term prospects.
Bull case for Lloyds share price
Banking stocks generally perform well when the economy is doing well. The reopening of most sectors in the coming months could help the UK economy to rebound strongly. Lloyds Bank has a good local presence and an excellent network of branches in the UK.
Lloyds Bank is increasingly focusing its attention on digitalisation. In my opinion, this is a very good step as more customers prefer to do digital transactions at their convenience, in their homes. The bank could also save a lot on operating costs in the long term and increase its profits.
The stock has underperformed in the last year compared to its competitors like Barclays, which is geographically diversified. Some of the possible reasons for the underperformance could be the Covid-19 pandemic and Brexit. However, these fears are slowly fading, with the drop in Covid-19 cases and less disruption from Brexit so far.
The bank has a stable capital position. Its Common Equity Tier 1 ratio is 16.2%, up from 13.8% at the end of 2019. The ratio is well ahead of the management’s target of 12.5% and regulatory requirement of 11%.
Bear case for Lloyds share price
The bank is more focused on the UK when compared to the other major banks like Barclays and HSBC. If the UK economy fails to pick up as expected, then it could negatively impact the bank’s financial results. Covid-19 cases are slowing and the vaccine rollout is going as planned. However, there is no assurance that Covid-19 case numbers will not rise again in the future.
Lloyds Bank has been lending money to businesses in the UK. There could be defaults that might reduce the company’s profitability. For example, the Coronavirus Business Interruption Loan Scheme (CBILS) is about 80% guaranteed by the government. The lenders still have the 20% risk. We have also yet to know exactly the damage caused by the pandemic.
The banking sector is getting very competitive. Lloyds Bank faces competition from a lot of local banks and also international banks that have operations in the UK. Another concern is the growing fintech firms that are eyeing the lucrative banking sector.
Finally, interest rates might remain low for a longer period than expected. This might put pressure on the bank’s profitability as banks make money from the difference of interest received from its advances and interest paid to its depositors.
Lloyds Bank is a potential play for the UK economy. Its strong capital position and shift to digital banking are positive. However, there is still uncertainty in the overall business environment. So I am not a buyer of the stock today, but would consider buying at lower levels.
Royston Roche has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays, HSBC Holdings, and 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.