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What a UK recession could mean for the Lloyds share price

It almost goes without saying that a recession would be bad news for the Lloyds share price [LLOY.L]. Rising energy costs, tax hikes, soaring inflation and conflict in Ukraine could well lead to the UK economy contracting this year.

Considering Lloyds’ stock is seemingly tied to the UK’s economic performance, none of this is good news for shareholders. Throw in competition from challenger banks, and it’s clear that 2022 isn’t going to be a cakewalk for Lloyds.

Yet the bank’s stock could be good value for investors with a long-term outlook. It’s cheap, carries a healthy dividend and the bank has outlined a strategy to diversify revenues. So, how likely is a recession and is the risk/reward payoff worth it?

What’s happening with the Lloyds share price?

Lloyds’ share price has slipped 6.3% over the past month and 5.9% since the start of the year (as of Thursday 14 April). Yet over a two year period the stock is up 47.72% having clawed back most of its pandemic-era losses.

Before the coronavirus triggered selloff, shares in Lloyds were trading at around 58p at the start of February 2020. The bank’s army of investors will be hoping that the stock can get back to those levels. But given recent pessimism over the UK economy, that might not happen soon enough.

 

Lloyds share price at risk from recession fears

Technically a recession is a fall in GDP for two consecutive quarters. Given that UK GDP grew 1% in the final three months of 2021 compared to the previous quarter and was up 0.1% in February, following 0.8% growth in January, according to ONS data, then an actual recession isn’t something that’s going to happen in the next couple of months. 

Still, forecasts for the second and third quarter of the year seem a little too close for comfort. Deutsche Bank is forecasting a 0.3% contraction in the second quarter, followed by a 0.2% growth in the third quarter.

Even if the U.K. manages to avoid a recession this year, the downbeat estimates are unlikely to do the Lloyds’ share price any favours.

Will challenger banks usurp Lloyds?

Another challenge Lloyds will have to face comes from so-called challenger banks which promise a better user experience for customers. Monzo and newly-launched Chase are just two examples. RBC Capital Markets recently issued Lloyds a double downgrade from Outperform to Underperform off the back of competition worries.

"The vision for the bank is too long-dated and comes with significant execution risk; we would rather wait before buying into the story," it said.

The ‘vision’ could be Lloyds CEO Charlie Nunn’s long-term goal to diversify the bank's revenue streams by offering more products to its clients, including wealth management services. Nunn also hopes to increase the bank’s digitally active customers to more than 20 million by 2024, up from the current 18 million.

The threat from challenger banks could be overstated. Monzo, for example, has 5 million customers compared to Lloyds 26 million customers. And despite a splashy advertising campaign and backing from JP Morgan, it's still too early to judge how serious a threat Chase really is to traditional UK banks.

A possible value stock?

Lloyds share price could represent good value for investors. Shares in the bank aren’t exactly expensive at a shade under 45p, especially considering the stock’s 6x profit to earnings multiple. The bank is also highly profitable. In 2021 Lloyds’ pretax profits came in at £6.9bn, up from £1.2bn the previous year. For income seekers, the bank has a decent 5.82% forward dividend yield.

Hikes in interest rates will also help the bottom line. Speculation is that the Bank of England’s Monetary Policy Committee will raise rates to 1% when it next meets in early May. Although this is a double edged sword for Lloyds. As interest rates increase it can charge more for its mortgages and debt products, yet rising interest rates could add to pressure on consumer wallets, in turn hurting the wider economy.

As it stands, Lloyds’ share price has a 58p median price target from analysts polled by Refinitiv. Hitting this would see a 28.9% upside on Thursday’s closing price.

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