Lloyds’ share price is down over 51% so far this year (through 1 June). Unlike Barclays [BARC], Lloyds’ [LLOY] share price has struggled to break out. With a couple of exceptions, Lloyds has oscillated between 28p and 32p since the end of March. The month before, Lloyds’ share price had at one point been trading over 58p.
The share price spiked on 7 May when the Bank of England backed UK banks to withstand the pandemic. According to the BoE, even if the UK economy shrinks by 30%, banks should be able to keep lending thanks to capital buffers built up post-2008. This was only a brief reprieve for Lloyds share price. Over the course of May, the stock finished up on the day a measly five times.
Yet credit defaults stand to be eye-watering as people and businesses struggle to pay back loans. In a scenario published in the BoE's Monetary Policy Report, banks will rack up £80 billion in credit losses. Thus, Lloyds’ shareholders might be asking whether it's time to cut losses? Or is the share price's current level undervalued considering the bank's underlying strength?
How exposed is Lloyds’ share price to credit losses?
Lloyds saw 95% knocked off its pre-tax profits year-on-year in first-quarter results. This was due to setting aside £1.4 billion to cover credit losses. The bank said that it expects further charges later in the year. However, Lloyds has said it has low exposure to the sectors worst hit by the outbreak.
In Lloyds’ own analysis, the bank is forecasting credit losses in the region of £5 billion in 2020. This best-case scenario sees the UK economy shrink 5% in 2020, before rebounding 3% in 2021. Lloyds’ worst-case scenario predicts £7 billion in credit losses.
YoY drop in Lloyds' Q1 pre-tax profits
How strong is Lloyds’ capital buffer?
Lloyds’ core equity one ratio - a measure of a bank's capital reserves - came in at 14.2% in Q1, larger than some of its rivals. Barclays, for example, has a 13.1% ratio. Such a large buffer should help Lloyds absorb some of the predicted credit losses that are likely this year.
Following Q1 results, Barclays Capital picked Lloyds as the best UK banking bet post-coronavirus. The analysts cited Lloyds' strong capital position and left their 50p price target untouched. Hitting this would see a 62% upside on the current share price.
What do the analysts think?
Of the 23 analysts covering the share price on the Financial Times, 14 rate it either a Buy or Outperform. None rate it a Sell. An average 12-month price target of 40p would see a 29.6% upside on Lloyds’ current share price.
Lloyds’ share price is sensitive to any news on the UK economy. At the end of May, the stock rallied on rumours of vaccine treatments and an easing of lockdown. Yet for the share price to break out of its current range, markets will need evidence of a longer-term recovery.
For short-term traders, now may be the time to cut losses. After all, there will be further ups and downs for the share price in the coming days and months. But for the long-term investor, holding on to the stock for a year or two could prove a positive investment.
|PE ratio (TTM)||13.99|
|Quarterly Revenue Growth (YoY)||-35.10%|
Lloyds' share price vitals, Yahoo Finance, 2 June 2020
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