The Lloyds Banking Group (LSE:LLOY) share price hasn’t had a pleasant time of late. If I’d bought shares of the bank five years ago, I’d have lost around 38% of my investment.
The performance doesn’t seem great when you look over the last three years (-43%) and over the last year (-29%) either.
Despite that, the FTSE 100 bank has rallied in recent months, leading some investors to believe that the shares could be ripe for a long-term recovery.
I don’t own shares in the company right now, but I’m often tempted by a value opportunity when shares fall significantly over a period of time. So does the Lloyds share price represent a buying opportunity for me right now?
Falling profits
Lloyds’ annual earnings report was released earlier this week. The headline stats didn’t make for great reading for investors. Annual pre-tax profits were 72% lower, falling to £1.2bn. The bank said the impact of the Covid 19 pandemic was the biggest contributing factor to the drop.
It also said impairment charges increased to £4.2bn as a result of the pandemic. Impairment is the permanent reduction in value of an asset. This is often caused by an unexpected event or a change in consumer demand.
Outgoing CEO António Horta-Osório didn’t hide the difficulties facing the business. “Significant uncertainties remain, specifically relating to the pandemic and the speed and efficacy of the vaccination programme,” he said.
Economic uncertainty due to the pandemic, as well as Brexit, appear to have held profits back for Lloyds in recent times, and the share price has faltered as a result of that.
While news of the vaccine programme may be positive, the indications are that the economic hangover of the pandemic could remain for quite a while. Interest rates are at record lows and there’s little indication that they will be heading upwards any time soon.
Upside
It’s not all bad news for the Lloyds share price though. As part of the earnings announcement, it said that it would be reinstating its dividend to 0.57p a share, so it could resume a “progressive and sustainable ordinary dividend policy”.
The payment was the maximum allowed by the Bank of England in order to protect the balance sheets of those in the sector. The fact that Lloyds was confident enough to pay out the maximum possible dividend is encouraging for potential investors.
As the UK’s largest mortgage lender, the bank is still seeing growth in its mortgage and deposit revenues with the property market remaining strong.
Analysts have been confident that the share price can return to growth. Citi brokers have recommended ‘buy’ on the shares, citing expected positive earnings momentum and large capital returns in the second half of 2021 for UK domestic banks.
But I still see too much risk to buying Lloyds shares right now. There are just too many uncertainties right now regarding how the economy and interest rates will recover post-Covid. That’s why I won’t be adding the shares to my portfolio at the moment.
