Around this time last year, I asked if it was time to buy shares in Lloyds (LSE: LLOY) considering the bank’s then low price.
I determined that while the Lloyds share price looked cheap, its outlook is far from clear as the pandemic laid waste to the UK economy. I concluded that long-term investors might benefit from buying the bank at depressed levels, but it certainly wasn’t suitable for all.
As it turns out, I was on the money. The stock has increased in value by 36% in the past 12 months. However, it has been a rough journey. Between the beginning of April last year and the middle of September, the stock lost a quarter of its value.
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Despite the bank’s incredibly positive performance over the past 12 months, I would still buy the shares today.
The outlook for the Lloyds share price
Now we seem to be through the worst of the coronavirus pandemic, the outlook for the UK banking sector is looking up.
While all lenders are still expecting to write off billions of pounds in loans thanks to the crisis, it doesn’t look as if losses will be anywhere near as bad as worst-case estimates. That’s great news for lenders like Lloyds, which can now focus on returning to growth and boosting their lending capacity.
Unfortunately, the one hangover from the crisis that is unlikely to go away any time soon is low interest rates. When interest rates rise, banks can earn more on the money they lend to borrowers. With interest rates set to remain at record lows for the foreseeable future, this suggests Lloyds and its peers will have to find other ways of making money.
This issue could weigh on the Lloyds share price for years.
On this front, the group has made significant progress over the past few years. Management has been building out a wealth management division and bought credit card provider MBNA.
Overall, I think these different business lines will help Lloyds make the most of the UK economic recovery and improving consumer confidence over the next few months and years.
Risks ahead
I think the Lloyds share price has a bright future, but I don’t think it will be plain sailing for the group from here on out.
As noted above, low interest rates will remain a significant headwind for some time. High costs and increasing regulatory demands may also restrict profitability and growth.
The pandemic has also alerted consumers to the gulf in technology between large lenders such as Lloyds and smaller challenger banks such as Starling. Lloyds will need to invest more in its technology to catch up to these challengers, or it could end up losing a significant number of customers.
Still, despite the risks and challenges the group faces, I continue to believe the Lloyds share price is undervalued and has enormous potential. That’s why I would buy the stock for my portfolio today.
