Lloyds’ (LSE: LLOY) shares have fallen around 10% since the announcement on 10 March of the collapse of Silicon Valley Bank. They remained depressed on further news that struggling Credit Suisse would not receive fresh funding from its major shareholder.
The decline in Lloyds’ share price is in line with similar drops in the price of many other bank shares. However, there are three reasons why Lloyds’ shares should be bought by me right now at a bargain price.
Continued strong performance
First, Lloyds’ Q4 results showed that it continues to perform extremely strongly. Profits before tax were £1.8bn, up 80% year on year. Revenues over the same period rose more than 20% to £5bn. This was ahead of consensus analyst expectations of £4.7bn.
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Also positive was that the bank’s net interest margin increased year on year to 3.22% in Q4. This was again ahead of consensus analyst expectations of 3.16%.
For the full year, underlying profit before impairment of £9.0bn was up 46% on 2021.
Second, Lloyds decided to pre-emptively offset the impact of any significant deterioration this year in its operating environment.
This was done by making a £1.51bn impairment charge for 2022, compared to NatWest’s £337m. Barclays’ 2022 impairment charge of £1.22bn followed a separate £1.597bn in litigation costs from its over-issuance of bonds in the US.
Overall cost discipline also remained good at Lloyds. Operating costs were £8.8bn in 2022, a rise of just 6% over 2021 — in line with guidance.
UK and international growth strategy
Third, Lloyds’ growth strategy is well balanced between the UK and international markets. As part of its ‘Helping Britain Prosper’ initiative, Lloyds is expanding its presence as the UK’s largest mortgage provider. Last year it lent £14.3bn to the UK’s first-time home buyers.
The strategy also includes funding for the UK’s transition to a low-carbon economy and its key growth industries. In 2022, Lloyds funded over £13bn in green and sustainable financing. It also made around £12bn of discretionary investments in climate-aware strategies through Scottish Widows.
Lloyds is also looking to bolster its Corporate & Institutional banking business that has a significant international presence. Specifically, it wants to expand its trading and origination capabilities across debt capital markets, foreign exchange and fixed income.
One risk for Lloyds is that the UK economy significantly underperforms other Western economies over an extended period. However, it looks to me that Lloyds’ expansion of its Corporate & Institutional banking and energy transition businesses will offset any lost opportunities elsewhere.
£2bn buyback announced
Additionally positive for the stock is the planned £2bn share buyback announced in the Q4 results. Also announced was an increase in the bank’s 2022 full-year dividend to 2.4p, an increase of 20%.
Given the bank’s solid fundamentals, growth prospects and the recent sharp fall in its share price, I have added to my holding of Lloyds shares.
