The Santa Rally didn’t last long. Not for Lloyds (LSE: LLOY) shares anyway after they fell to 42p, touching a 52-week low.
The pullback happened after the FTSE 100 bank got into a spot of bother over how it sold car loans. Me? I think the shares look great as they’re even cheaper.
The recent news concerning car loans isn’t great, I accept. The Financial Conduct Authority (FCA) isn’t happy with unfair costs on certain car financing. If widespread misconduct is found then fines will follow and Lloyds is more exposed than any other major bank.
Room to grow
The scale of the fine? Brokers are estimating up to £1bn, a tidy sum. But the Black Horse bank did book net earnings of £6.8bn last year.
Looking at the share price, it fell 12% and the bank lost about £3bn in market value. My guess is it’s an overreaction. After such a drop, there’s plenty of reason to suggest to me that the shares have room to grow.
UK banks in general look sorely underpriced, I feel. The sector’s price-to-earnings (P/E) ratio of 5.2 is some way lower than the three-year average of 9.8 and the five-year average of 12.9.
The underpricing of our banks is even getting political attention. The chiefs of all major banks attended a ‘share price summit’ with Chancellor Jeremy Hunt last week. It seems even in Whitehall they’re asking themselves why the banks are so cheap.
Spot of relief
Here’s one reason. Interest rates are set to be slashed and that’s more bad news for Lloyds. Or is it? Well, yes and no. High interest rates are a boon for the big banks as increased margins create juicy profits.
Except Net Interest Margins (NIM) might be starting to come down. Customers are getting wiser and scouring rate son offer from the many smaller banks and fintechs to get better deals. According to Fitch Ratings, increased competition for deposits has already caused NIMs to peak.
Prolonged high interest rates harm banks too when beleaguered borrowers can’t afford their loans and mortgages. Lloyds has already booked £2.4bn of impairments since 2022. The supposed upcoming rates cuts might provide a spot of relief.
A buy?
Perhaps the biggest risk is a weak UK economy. Revised data showed a contraction in Q3 2023 and the beginning of Q4 didn’t look pretty. The UK may already be in a recession. Lloyds is heavily exposed domestically as the nation’s largest mortgage lender.
On balance though, I think the share price is too low. Even if the stock doesn’t starting rising soon, dividends are higher than they have been for years. The Lloyds forecast of 7.44% for 2024 and 8.24% for 2025 won’t be beaten by many companies the world over. I’d buy more shares if I had the spare cash.
