Why is the Lloyds share price falling yet again? Here’s why I would buy today…

With the Lloyds share price more than halving over the past 12 months, it’s no wonder investors are running scared. But I see deep value in buying today.

| 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.

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.

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!

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.

Cliffdarcy has no position in any of the shares 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

With a P/E ratio of 9, is the Aviva share price a bargain?

Christopher Ruane looks at the Aviva share price and considers some strengths and weaknesses of the FTSE 100 insurance business.

Read more »

Surprised Black girl holding teddy bear toy on Christmas
US Stock

Is it too late to buy growth stock Shopify after its 25% pop?

Up more than 40% this year, Shopify is on fire at the moment. Here, Edward Sheldon explains how he’d play…

Read more »

Investing Articles

Investors should consider buying this energy AIM stock, up 50% in the past year

AIM stock Afentra has seen a stellar price rise in 12 months to November. I believe there may be room…

Read more »

Investing Articles

2 ISA shares to consider for a large passive income!

Looking for dividend shares to buy in a Stocks and Shares ISA or Lifetime ISA? Royston Wild reveals two of…

Read more »

Young mixed-race woman jumping for joy in a park with confetti falling around her
Investing Articles

A Bitcoin investment that can be held inside a Stocks and Shares ISA or SIPP

UK investors can’t buy Bitcoin ETFs for their investment accounts or SIPPs due to FCA regulation. This stock could be…

Read more »

Entrepreneur on the phone.
Investing Articles

As the Vodafone share price slides 6% on lacklustre H1 results, what does the future hold?

After posting moderate results this morning, Vodafone saw its share price sink further, erasing this year's gains. Our writer looks…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing For Beginners

If I’d invested £5k in a FTSE tracker fund after the pandemic crash, here’s what I’d have now

Jon Smith explains the extent of his potential gains if he'd invested in a FTSE tracker fund during the Covid…

Read more »

Investing Articles

2 top shares I’ve bought for my Stocks and Shares ISA in November

This writer reveals a pair of fast-growing businesses that he's recently added to his Stocks and Shares ISA for the…

Read more »