Over the past year, Lloyds (LSE: LLOY) has been a rewarding share for investors. The dividend per share grew 15% and currently the yield is 5%. The Lloyds share price has grown 33% in the past 12 months.
Still, on some measures, the valuation continues to look like a bargain.
Last year, post-tax profits were £5.5bn. Set against a current market capitalisation of £34.8bn, that means the black horse bank trades on a price-to-earnings ratio of just seven.
So, even after an impressive 12-month increase (triple the 11% growth in the flagship FTSE 100 index during that period), could the share keep on moving up?
Let’s look at the positive (bull) case – and the negative (bear) one.
A bullish investment case
The profits last year point to some of Lloyds’ strengths as a business.
It operates in an area likely to experience high demand over the long term. Within that field, it has some specific advantages over rivals. It has a large customer base and indeed is the country’s biggest mortgage lender.
Its domestic focus shields it from some of the international risks faced by London-listed global banks like Standard Chartered and HSBC (though even domestically-focussed banks can be affected by problems in the global financial system).
The bank has proven it can make huge sums of money with its business model. In the first quarter of this year, its statutory profit after tax was £1.2bn.
The bearish side of things
Still, although that is a big profit, it was still a decline of 26% compared to the same period a year earlier. That could be a sign of a weakening economy hurting the business. But in fact the bank said that it has improved its economic outlook.
Still, that is a risk that concerns me. The large mortgage book could see assets turning into liabilities if a property crash sees a rise in the level of borrower defaults. While UK banks look stronger now than in the 2008 financial crisis that clobbered them (and since when the Lloyds share price has never recovered to anything like its former level), any rise in defaults is always a risk for banks.
Lloyds continues to close branches, with over two per working day on average set to shut this year. In the short term, that should cut costs. Longer term, though, I think reducing its branch footprint too dramatically could make it harder for Lloyds to differentiate itself from digital banks and fintechs.
Weighing the pros and cons
If the economy continues as it is, I think the Lloyds share price could keep rising.
It looks cheap relative to earnings and the 0.87 price-to-book ratio also looks like good value, as long as the mortgage book does not get substantially written down.
But the economic outlook remains weak in my view. Lloyds is massively profitable but has still not restored its dividend to pre-pandemic levels, making me question how focussed current management is on the shareholder payout.
So, I will not be investing.
