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Are institutional investors right to back Lloyds’ share price?

Lloyds’ [LLOY] share price mounted a recovery of sorts last week as investors shrugged off the dire half-year results published at the end of July. Adding impetus was optimism from the Bank of England over the prospects of a nationwide recovery, good news for Lloyds given its position as a bellwether of the UK economy.  

Institutional investors are backing Lloyds’ share price, which is somewhat unsurprising given they own over 81% of the bank’s shares, according to data from Simply Wall Street published last week.

Top of the list is BlackRock which owns 6.6% of Lloyds’ outstanding shares. Some traders will take institutional backing as a sign of Lloyds’ long-term prospects, especially since the bank is well-capitalised and has been making strides to reduce costs.

However, as Simply Wall Street points out, professional traders can make mistakes and it will only take a couple of institutions selling their holdings for Lloyds’ share price to dip further.

So, are the institutions right to back Lloyds’ share price, or are there still too many risks for individual investors?

 

 

What's happening with Lloyds’ share price?

Lloyds’ share price took a hammering when half-year results came out at the end of July. In the space of an hour, Lloyds’ saw 8% knocked off its share price as the bank went from a £1.3bn profit in 2019’s H1 results to a £676m pre-tax loss. 

Since that point, Lloyds’ share price has mounted a recovery, with investors apparently betting that half-year results represent the nadir, and now the only way is up. Lloyds’ share price closed 6.4% higher last week as investors bought back into the stock.

Whether this mini-rally holds will depend on continued positive economic data. Longer-term, how fast the UK economy as a whole recovers will largely determine the extent of Lloyds’ revival.

 

Optimism from Bank of England

Some good news came last Thursday 6 August at the Bank of England's (BoE) Monetary Policy Committee meeting. The committee said that the initial impact of lockdown had been less severe than forecasts in May feared, with consumer spending expected to drive a recovery in the coming months. The committee now expects GDP to fall by 9.5% this year, a significant improvement on the 20% contraction predicted in May.

While no one expected them to go up during the committee’s meeting, the historic lows at which interest rates are now sitting is hurting Lloyds’ profitability. Andrew Bailey, governor of the BoE, has said the Bank has no plans to cut interest to negative rates, allaying the fears of many. It's also good news for Lloyds’ lending business, which would have seen profits squeezed even further with negative interest.

Should the BoE's forecasts hold out, Lloyds’ share price could gain in the long-term. However, investors should be aware that the BoE expects output in the UK to slow in the third quarter.

 

Market Cap£20.595bn
PE ratio (TTM)72.75
EPS (TTM)0.40
Quarterly Revenue Growth (YoY)-69.5%

Lloyds share price vitals, Yahoo Finance, 11 August 2020

 

So, is it time to buy Lloyds?

Despite the Bank of England's optimism, not everyone is convinced that the economy is going to bounce back:

“The V-shaped recovery that the BoE continues to project seems unlikely, to put it very mildly,” the Financial Times quoted Kallum Pickering, economist at Berenberg, as saying. “In our view, economic developments will very likely fall short of this near-perfect scenario and . . . policymakers may eventually need to do more to support the recovery.”

“In our view, economic developments will very likely fall short of this near-perfect scenario and . . . policymakers may eventually need to do more to support the recovery” - Kallum Pickering, economist at Berenberg

 

GDP figures due out this week will also likely show that the UK economy contracted 21% in the second quarter. This will officially mark the start of a recession in the UK, something that hasn’t been seen since the 2008 financial crisis. Given the bank's exposure to the domestic market, Lloyds’ share price could see some turbulence.

Among the analysts tracking the stock on the FT, Lloyds has an average 39p price target, which would see a 40.34% gain on the current share price through 7 July’s close.

The longevity of last week's optimism and the accuracy of Pickering's assessment will both be key factors in determining whether or not Lloyds’ share price hits this target in the next 12 months.

Disclaimer Past performance is not a reliable indicator of future results.

CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

CMC Markets does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.

*Tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.

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