The Lloyds Banking Group (LSE: LLOY) share price has performed well over the past week. In fact, it’s up 10.4%, making it the best performer over this period in the FTSE 100. Unfortunately, if we expand the time horizon, the share is still down 34% over a one-year period. I’d look to buy the share for several reasons, but am conscious of some risks.
A better outlook
My first reason isn’t particularly technical in nature. Simply put, I think the outlook for the bank (and therefore the Lloyds share price) is much better than last year. The UK managed to avoid a no-deal Brexit. An agreement on financial services is due in coming months. The UK has vaccinated over 13m people against Covid-19. The UK Government is continuing to provide generous fiscal support to try and boost the economy.
All of the above are positives for companies trading in the UK. Lloyds is one of these companies, and so is feeling the benefits of this via a short-term move higher in the share price. This isn’t particularly company-specific, but the wider environment is certainly helping.
The second reason I like the Lloyds share price is due to the potential dividend resumption. The Bank of England has removed guidance urging banks not to pay dividends. Lloyds returned to a profit of £1bn in Q3, with a loan-to-deposit ratio of 98%. It means it has the liquidity to pay out a potential dividend.
Downside risks for the Lloyds share price
One big risk I’d note is the gradual reduction in the net interest margin. In the Q3 update, Lloyds specifically flagged this up as a reason why group income was down 17%. The net interest margin stands at 2.42%. This is the difference between the rate the bank lends out at versus the interest it receives. This margin has been decreasing, as the UK base rate has been cut. It takes time for the difference to filter through, and so this move lower is likely going to continue through 2021. There isn’t much the bank can do on this, and so it could be a negative drag on the share price that I should be aware of.
The second risk is the delayed impact on finances and loans from Covid-19. The bank has set aside large provisions for bad debt during 2020. Some £4.1bn through to Q3 has been reserved, and Lloyds says it’s a realistic level given “no significant change in economic outlook”.
As discussed above, the outlook could be rosy this year. But I think the drag from the pandemic might not be fully appreciated. Consumers and businesses are being supported by furlough cash and other fiscal measures that will stop at some point. In this case, there could be a rise in loan defaults that isn’t currently taken into account by Lloyds or the share price.
Overall, I’m looking to buy back into the Lloyds share price shortly, acknowledging the potential risks.
