It’s been a pretty unpleasant week for shareholders on both sides of the Atlantic. Indeed, this week is shaping up to be the worst since the March market meltdown. As I write, the US S&P 500 has shed almost 200 points (5.7%) since last Friday. Here in the UK, the FTSE 100 index has dipped around 270 points (4.6%) in a week. Maybe these steep weekly falls explain why Lloyds Banking Group (LSE: LLOY) has had a poor week. For the record, the Lloyds share price is down 1.3p (4.4%) this week.
The Lloyds share price remains volatile
As I write (late on Friday afternoon), the Lloyds share price hovers around 27.95p, down nearly 1.2% today. At this price, the entire group is worth just £20bn — an incredible £32bn less than its market value before Christmas last year.
At its 52-week high, the Lloyds share price closed at 73.66p on 13 December 2019. That’s around 2.63 times the current share price, so Lloyds’ stock has fallen by two-thirds (62%) from this top. What’s more, the share price is drastically down over pretty much any time period you care to name. For example, it has crashed 51.5% over a year, 52% over three years, and 62% over five years.
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In fact, just about the only time you would have made money buying this stock was since 22 September, when the price collapsed to a fresh low of 23.59p. Yikes.
But Lloyds is back in profit
Sure, Lloyds shareholders have endured a terrible 2020 so far, but there is a ray of hope for the bank’s owners. Yesterday, Lloyds released its third-quarter results and, in my opinion, they weren’t half bad. After enduring a nightmare second quarter, the UK’s largest retail bank’s metrics mostly returned to growth, yet the Lloyds share price is only 1% higher today.
In Q3, Lloyds set aside just £301m towards loan losses, just an eighth of the £2.4bn booked in Q2. As a result, Lloyds made a pre-tax profit of £1bn, versus a loss of £676m in Q2. Other bright spots included a 22% share of the mortgage market, which is the liveliest it’s been since 2007. Likewise, a £35 billion (9%) increase in group deposits in nine months shows that savers still trust Lloyds with their cash. Yet none of this good news has moved the needle on the Lloyds share price.
I think Lloyds’ shares are still cheap
With the Lloyds share price below 28p, you’d think that the bank was in danger of going bust. Yet the bank’s balance sheet, capital position, and liquidity are all strong. For example, the bank’s Common Equity Tier 1 (CET1) ratio — one measure of financial strength — stands at 15.2%. This is well above the regulatory minimum requirement of around 11%. What this tells me is that Lloyds may have tens of billions of excess capital — either to meet future loan losses, or to return to shareholders.
To sum up, I’ve said this before and I’ll say it again: I think the Lloyds share price is far too depressed, partly due to relentless selling pressure. Today, it’s a leveraged bet on a return to post-Covid-19 normality, the resumption of consumer spending, and stable mortgage lending. For these and other reasons, I’d happily buy Lloyds shares today, ideally in a tax-free ISA, so as to capture future capital gains and the eventual return of Lloyds’ suspended dividends!
