Is the Lloyds share price heading to 40p?

Brexit headwinds and economic uncertainty could push the Lloyds share price down to 40p, says Rupert Hargreaves. But this could also be a great opportunity for value-seeking investors.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Over the past 12 months, the Lloyds (LSE: LLOY) share price has come under heavy selling pressure. Shares in the bank are down around 12% since the beginning of October last year, underperforming the FTSE 100 by about 7%, excluding dividends paid to investors.

There are a handful of reasons why investors have been turning their backs on the bank in 2019. Most of these are external. For its part, Lloyds has continued to grow, cut costs and return cash to investors.

However, the market is focusing on these external factors facing the business, which are likely to hit profitability. It would appear most investors are trying to get out before this happens.

External factors

The most significant risk facing the Lloyds share price is Brexit. We don’t know what will happen if the UK leaves the European Union without a deal at the end of this month, but all forecasts suggest the economy will suffer.

For Lloyds, which is one of the largest banks in the UK and the largest mortgage lender by volume, this is particularly troubling. If people lose their jobs they can’t pay their mortgages, and the bank will have to write down the value of its loan portfolio as a result. Falling home prices will only compound the problem. 

Further, policymakers at the Bank of England have said it’s likely they will reduce interest rates in a no-deal scenario. Banks rely on high-interest rates to make money. If the base rate falls further, the rates of interest Lloyds can charge customers will have to fall as well. 

Then there’s the competition in the banking sector to consider. New ring-fencing rules, which force banks with more than £25bn in assets to separate their investment and retail arms, have had the unintended result of flooding the market with capital. Banks are now fighting each other for more customers, and a price war is on. Several financial institutions have already warned this year the price war is impacting their profit margins.

For the time being, Lloyds seems to be coping well. In its results for the first half of 2019, the bank told the market its net interest margin remained “resilient” at 2.9%.

Weathering the storm

There’s no ignoring the fact all of the above are issues could significantly impact Lloyds’s profitability over the next few quarters. However in my opinion, the bank is exceptionally well-positioned to weather the storm and could come out stronger on the other side.

The group earned a return on tangible equity — a measure of bank profitability — of 11.5% during the first quarter, whereas most of its peers struggled to achieve a return of 10%.

At the same time, Lloyds’s capital ratio hit 14.6% at the end of June, above management’s minimum of 12.5%. The bank’s costs have also come down substantially over the past 12 months. The cost:income ratio was 45.9% at the end of June, down from 47.7% in the prior-year period. This should help the group’s profitability if earnings come under pressure due to rising loan losses.

Overall, while Lloyds is facing headwinds, I think the group is well-placed to manage these issues. As a result, if the stock does fall much further, I reckon this could be a buying opportunity for savvy value investors to snap up a bargain.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

How much would I need to invest in income shares to earn £300 a month?

What kind of lump sum would be required to earn £300 a month by taking advantage of some of the…

Read more »

Investing For Beginners

Up 31% in a month, could this FTSE 250 stock be getting bought out?

Jon Smith takes a look at speculation that's pushing the share price of a FTSE 250 share higher and considers…

Read more »

Investing Articles

Here’s how I’d follow Warren Buffett to start building passive income in 2025

Ben McPoland highlights one FTSE 250 firm with a strong competitive edge that he thinks can continue rewarding investors with…

Read more »

Investing Articles

Burberry shares: undervalued FTSE gems that are ready to rocket?

Burberry shares soared at the beginning of the week as the takeover rumour mill went into overdrive. Is Paul Summers…

Read more »

US Stock

Here are the latest share price forecasts for S&P 500 giant Amazon

Amazon has generated monster gains for investors over the last decade. And Wall Street analysts believe the S&P 500 stock…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

2 high-yield FTSE 250 shares I’d buy today — and 1 that I’d avoid

UK markets have felt some volatility after last week’s Budget and the FTSE 250 was no stranger to it. Our…

Read more »

Investing Articles

3 reasons the Rolls-Royce share price could soar over the next decade

Sustainable aviation fuel, narrow-body aircraft, and small nuclear reactors could all keep the Rolls-Royce share price climbing over the next…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

Here’s how much income I’d get if I invested my entire £20k ISA in cheap BT shares

BT shares are on the up but still cheap, while the FTSE 100 telecoms stock offers a good yield too.…

Read more »