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Can Lloyds’ share price recover despite UK economy woes?

Lloyds’ share price, trading circa 50% lower than where it started the year, is ample proof that the banking sector has not been immune to the coronavirus-induced economic coma this year. 

As a reflection of the UK economy, Lloyds’ [LLOY] share price was inevitably going to suffer in the wake of the coronavirus. The outbreak has hit Lloyds’ lending businesses, profits are down across the board and the risk of a spike in bad debts looms large.

But with the UK economy easing out of lockdown, is the worst over for the bank? And, if so, is Lloyds’ share price now a bargain?

 

How is Lloyds’ share price affected by the UK economy?

The global pandemic has had a huge impact across all areas of life, and the economy is no exception. UK GDP plummeted to -2.2% quarter-on-quarter in Q1’s final reading. The Bank of England slashed UK interest rates twice in March, taking the UK base rate to an all-time record low of 0.1%.

While this might be an unexpected bonus for those with variable or tracker-rate mortgages, it doesn’t leave much wriggle room for banks. On top of this, the outbreak has brought the housing market to a near-complete standstill. As Lloyds is the UK's biggest mortgage provider, this will certainly have curtailed one vital revenue stream, and could well have influenced the sharp drop in Lloyds’ share price.

All in all, these headwinds have combined to suppress Lloyds’ share price, seeing it trade around the 31p level since May. In April, Lloyds’ share price reached its 52-week nadir of 27p as it cancelled dividends in an effort to conserve cash. For investors, though, the current climate could be an opportunity to pick up a bargain as the economy begins to reopen.

 

All eyes on half-year results

The pandemic has added to existing pressure on Lloyds' share price. Q1 results saw £480 million profit after tax, a 60% decline compared with last year. When a tax credit of £406 million is taken out of the equation, pre-tax profit is left at just £74 million. 

The majority of Lloyds’ income comes from lending, so its Q1 net interest income slipping by 4% to £2.95bn is far from good news. The net interest lending margin rate also dropped, to 2.79% from 2.91%. To cover the impact of the outbreak, Lloyds set aside £1.4 billion in cash, a jump of £1.1bn on the year.

60%

Profit after tax decline, quarter-on-quarter

For shareholders, all eyes are now on half-year results due on 30 July. This update should provide an insight as to how Lloyds is coping in these extraordinary times. If the bank is able to beat expectations, Lloyds’ share price could be set to rise. 

Of most interest will be any forecasts the bank offers as to where they think the UK economy is heading. If Lloyds forecasts the same short, sharp, V-shaped recovery it did in Q1 results, then its share price has even more potential to rise.

 

UK government support

Obviously, anything the UK government can do to help the economy is good news for Lloyds. One area of concern is the end of the furlough scheme in October, which could see people suddenly finding themselves out of work, and result in a spike in bad debt for the bank.

Instead of continuing the scheme on a sector by sector basis, the treasury has already hinted at a new green jobs initiative and a cash bonus scheme for firms that hire trainees. While these measures could help the economy, Chancellor Rishi Sunak has warned MPs not to get their hopes up for more substantial measures, such as tax cuts, before his Autumn budget.

 

So, time to buy Lloyds shares?

At its current level of 30.74p through 7 July’s close, Lloyds’ share price is trading 57.9% below its 52-week high of 73p. Of the 24 analysts tracking the stock on Yahoo Finance, 4 rate it a Strong Buy and 12 rate it a Buy.

-57.9%

The percentage difference between LLOY's current valuation and its 52-week high

Analysts at Jefferies, however, have cut their target price for Lloyds shares from 47p to 42p, believing its revenue profile is not a good fit in the current market conditions. Crucially, though, this level is still 36.6% above the current price, and Jeffries has maintained its ‘buy’ recommendation.

The suspension of its dividend should also help Lloyds to offset the increase in loan defaults. The overriding sentiment for Lloyds’ share price seems to be that there is room to grow and recover at least some of those share price losses.

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