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Is Lloyds’ share price a bargain right now?

Lloyds’ share price has plummeted since the coronavirus melted the markets. But are there further losses to come? Or have we hit the bottom?

As a bellwether of the UK economy, Lloyds’ [LLOY] share price is vulnerable to any drop in economic activity. And given the coronavirus pandemic has locked down huge swathes of the economy, that drop has been severe. 

The share price is trading around the 33p level, down a colossal 47.5% this year. Almost a decade ago shares were changing hands for around 25p. Nervy share price investors will be hoping that level isn’t tested again.

But with a first-quarter update out this week, what’s the outlook over the coming weeks and months? And is the share price at the right level for bargain hunters?

 

 

Can Lloyds’ share price weather the storm?

Lloyds has had a tough time of it the past couple of years. The share price was volatile last year as Brexit negotiations dragged on, sapping consumer and business confidence.

On the plus side, Lloyds took steps to streamline costs and invested in online banking. More importantly, post-crash changes in regulations mean it has a much stronger balance sheet than it did during the financial crisis. 

Lloyds will certainly need a strong balance sheet. UBS expects Lloyds to put aside £1.1 billion in impairments for the first quarter and reckons a 77% drop in profits to £363 million is on the cards.

77%

Lloyds' expected drop in profits to £363m

Is the worst yet to come?

As the UK's biggest lender, Lloyds could see its profits disappear into a credit shaped black hole as the lockdown continues. 

Sectors such as transport, hospitality and retail have seen revenues evaporate overnight. While the UK government is underwriting banks’ business lending, it's only doing so for new loans. Any struggling businesses will still have a hard time paying back old loans. As these aren't guaranteed by the state, Lloyds will take the hit on any defaults. 

There’s also questions over whether consumers will be able to afford credit card and mortgage bills once repayment holidays end.

Economic activity is already heavily under strain. Markit’s UK Composite PMI reading for April came in at 12.9 - its worst reading since it began two decades ago. And the longer the lockdown continues, the more businesses and people will struggle economically. The Office for Budget responsibility forecasts that a 3-month shutdown will see a 35% drop in GDP with 2 million jobs lost.

According to Berenberg, US and European banks face a 30% dive in profits this year and in 2021. 

“Confronted with reduced activity, lower-for-longer interest rates, inflexible costs and higher loan losses, the outlook for bank earnings is one-way traffic,” Berenberg analysts said in a note to clients.

“Confronted with reduced activity, lower-for-longer interest rates, inflexible costs and higher loan losses, the outlook for bank earnings is one-way traffic” - Berenberg analysts

 

 

Is Lloyds’ share price a ‘buy’?

Much depends on the UK economy bouncing back - or at least returning to some semblance of normality. If it reopens for business in the next couple of months, Lloyds’ share price could rally.

Despite its own gloomy forecast, The Office for Budget Responsibility thinks the economy could snap back with GDP returning to pre-coronavirus levels by the end of the year. 

 

Market Cap£23.542bn
PE ratio (TTM)9.83
EPS (TTM)3.40
Quarterly Revenue Growth (YoY)5.90%

Lloyds share price vitals, Yahoo Finance, 29 April 2020

 

This much-mooted V-shaped recovery would see a short, sharp downturn followed by a recovery. If this happens then it will be good news for both the economy and Lloyds’ share price. But don't hold your breath on that one. BoE policymaker Jan Vlieghe warned that the UK is facing the deepest slump in "possibly several centuries."

For now, City analysts have placed a 75.37p share price target on the stock. Hitting this would see a 125% upside on the current share price. Of the 24 analysts tracking the stock on Yahoo Finance, 16 rate the Lloyds share price either a 'Strong Buy' or 'Buy', suggesting there is confidence in the stock.

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