When I look at the Lloyds Banking Group (LSE: LLOY) share price, I’m stuck between two thoughts.
Part of me thinks it could double, or more, and still look fair value. So might it reach 100p?
But then I remember the past times when it’s looked super cheap, and it’s gone on to fall further. In fact, Lloyds fell under 25p during the pandemic, even though its business didn’t do too badly.
I doubt Lloyds shares will crash that far again (and yes, I know I’m tempting fate here). But I think there’s a real risk they could still fall in 2024.
Double whammy
Let’s start with the key factors that have put Lloyds shares through the mill. I’m talking of high interest rates, and their effect on the cost of mortgages.
It’s double-edged for Lloyds. As a lender, higher rates mean fatter lending margins and bigger profits. But for a bank so heavily into the mortgage business, bad debts and falling demand can damage profits.
At Q3 time in 2023, Lloyds reported a 3.15% net interest margin year-to-date, which is pretty decent. It dipped a bit in the quarter, to 3.08%, though.
The bank also recorded an impairment charge of £849m, following a £1,045m impairment for the same period of 2022. You win some, you lose some.
Interest rate cuts
So what will an interest rate cut do? Well, it should reduce Lloyds’ lending margins. But at the same time, it should also reduce the need for bigger impairments.
And if the past couple of years are anything to go by, I’d say Lloyds has been over-cautious with its impairments. And who knows, maybe we could even see some of it credited back.
On balance, I think a rate cut should be good for Lloyds and the other banks. But even if we get one soon, there’s still the economy.
Economists suggest UK growth in 2024 should be around 0.5%, which is pretty pathetic. Is that a scenario that would boost mortgage lending and get the property market soaring again? Hmm, maybe not.
Fundamentals
Even with all the uncertainty and risk, I’d say Lloyds stock still has one big thing in its favour.
I mean fundamental valuation measures, which I keep coming back to. And the market will come back to them some day too, won’t it? Over the long term, share prices do seem to return to fair value.
And we have a forecast price-to-earnings (P/E) ratio of only 6.5, and a 5.4% dividend yield. Nice.
This is when the City expects the financial sector to add around £30bn to profits in 2023. Once FY results start to roll in, might that give Lloyds shares a boost?
Optimism
On balance, I’d expect Lloyds shares to get closer to that 100p than 25p this year. I think all the way would be pushing it, though. And we have risky times ahead, for sure.
Still, this time next year I hope to come back and say “I told you so“. Or maybe I’ll be wrong and have to own up.
