CORRECTION: This article previously stated that “There is still uncertainty as to when the bank will resume its dividend.” Lloyds was only allowed to pay 0.57p per share for 2020 due to the caps imposed by Prudential Regulation Authority – previously, it paid 3.21p for 2018 and 3.05p for 2017, respectively.
The FTSE 100 index crossed the psychological 7,000 level this April. This was the first time it breached this level since the Covid-19 pandemic started last year. The successful vaccination drive has increased investors’ confidence. This is also evident in the strong performance of the Lloyds (LSE: LLOY) share price, which is a UK-focused bank.
I would like to see if it’s a good investment for my long-term portfolio.
Why the Lloyds share price might rise
Lloyds Bank has managed the Covid-19 crisis very well. The outgoing CEO, António Horta-Osório, has to his credit saving the bank following the 2008 financial crisis and now, during the pandemic. The government had pumped in £20.3bn for a 43% stake in the bank during the financial crisis and the Treasury fully sold all of its shares with a profit of about £900m.
The market experts are forecasting strong GDP (gross domestic product) growth in the UK. The Ernst & Young Item Club expects GDP growth of 6.8% in 2021. Goldman Sachs predicts an even faster growth of 7.8%. This is a big positive for a domestic-focused bank like Lloyds bank.
The strong expected economic growth is also evident in the bank’s recent first-quarter results. Lloyds Bank made a net impairment credit of £323m, which was driven by a £459m reserve release, due to the UK’s improved economic outlook. This is the amount that the bank had set aside for potential loan losses. This helped to increase the underlying profits to £2.1bn, compared to £558m for the same period last year.
The bank’s mortgage business is doing well. The stamp duty holiday and the UK government’s mortgage schemes should continue to help the bank’s business. Loans and advances increased to £444bn from £443bn and customer deposits increased by 8% year-on-year to £462bn. The bank’s balance sheet remains strong. The common equity tier 1 ratio (CET1 ratio) is 16.7%. This is significantly higher than the regulatory requirement of 11%.
The bear case for Lloyds share price
Most of the sectors of the economy are expected to be fully open in the coming months. However, it is too early to celebrate. If Covid-19 cases increase then the growth might be derailed. Also, actual GDP figures might differ from the analysts’ growth estimates. This, in turn, might negatively impact the bank’s profits.
Lastly, the outgoing CEO is known to have brought significant positive changes to the bank. There is always the initial uncertainty about the new CEO. If the new management makes some wrong decisions, then the stock might fall.
Final view
The bank is fundamentally strong. At the current price, Lloyds shares are trading at a price-to-book ratio of 0.65, compared to the historical five-year average of 0.81. I would consider buying Lloyds shares now.
