Lloyds Banking Group’s [LLOY] share price has seen the biggest fallout from the coronavirus crash among banking competitors, losing close to half its value — 48% — from the start of the year through to the end of May.
However, since then the Lloyds share price has gotten some much-needed respite, climbing 6.9% in the first 12 days of June.
While some market commentators believe that Lloyds’ share price is piggybacking a broader rally across markets, others consider whether it was simply oversold during the market crash.
What is really driving the optimism behind Lloyds’ share price this month?
A beneficiary of the FTSE’s rise
Up until the start of June, the bank had been beaten down amid rising fears that coronavirus “bounce back” loans would not be repaid by small businesses. Three senior bankers had told the Financial Times that an estimated 40% to 50% of borrowers that have accessed the scheme could eventually default.
CEO António Horta-Osório had given a grim statement during the firm’s first-quarter results. “The economic outlook is clearly challenging with the longer-term outcome dependent on the severity and length of the pandemic and the mitigating impact of government and other measures in the UK and across the world,” he said.
“The economic outlook is clearly challenging with the longer-term outcome dependent on the severity and length of the pandemic and the mitigating impact of government and other measures in the UK and across the world” - Lloyds CEO António Horta-Osório
Considering Lloyds is the most UK-focused bank among competitors such as HSBC [HSBA] and Barclays [BCS], there’s no wonder why investors and traders in Lloyds’ share price thought it could stand to lose the most from the situation.
The fact that the lender also suspended dividends at the end of March could have also driven the share price lower during that period.
Writing in The Motley Fool, Manika Premsingh says she is sceptical about what she sees as temporary momentum in the business.
The uplift in Lloyds’ share price came at a time when the FTSE 100 index was recovering as well, Manika Premsingh considered recently in the Motley Fool. Since the crash in March, the blue-chip index has recovered 21.4% from its 23 March low through to 15 June.
“The return of buoyancy in investing is lifting share prices across the board. I think the Lloyds Bank share price is one of the beneficiaries from this overall trend,” Premsingh writes.
It may even lead to some near-term recovery for the bank, according to the Premsingh. But if this is the case, it is due to factors distinct from the bank’s prospects.
While she is still critical of the possibility of a share price turnaround, while the UK prepares for a deep recession, she noted that it had so far outpaced the FTSE 100’s 0.001% climb from the start of the month through 11 June, and continues to do so – Lloyds’ share price is up 2.2% relative to the FTSE’s 1.7% decline so far this month (to 15 June).
“The return of buoyancy in investing is lifting share prices across the board. I think the Lloyds Bank share price is one of the beneficiaries from this overall trend” - Manika Premsingh
An oversold stock
The market has overreacted to Lloyds’ conditions, which makes buying the stock a good deal currently, Jonathan Smith wrote in the Motley Fool. He believes in the long-term potential of it.
If the stock moves back to trade within its range of the past five years — between 50–80p — then traders and investors would see a return of over 100% he says.
“A lot of the fall in the Lloyds share price is pricing-in the worst-case scenario,” Smith says.
Although many saw warning signs when the bank said in a recent trading statement that it has taken a £1.43bn hit for impairments on the credit and lending side, there may still be an upside.
“The impairment charge may be revised in coming updates, consumer demand may bounce back quicker than expected. The bank could benefit from government pandemic measures. Low-interest rates could be spun into a positive. For example, it could allow the bank to push clients towards higher profit areas such as wealth management,” Smith stated.
“The bank could benefit from government pandemic measures. Low-interest rates could be spun into a positive. For example, it could allow the bank to push clients towards higher profit areas such as wealth management” - Jonathan Smith
If analyst opinions are anything to go by, then the idea that Lloyds has been oversold is a winner. New highs for Lloyds this month led Morgan Stanley to reiterate an overweight rating for the stock on 5 June — although it did cut the share price target from 50p to 45p. Elsewhere, the Financial Times shows that of the 23 analysts covering Lloyds’ share price, 14 rate it either a buy or outperform.
Overall, the optimism behind the long-term appeal of Lloyds’ share price appears to remain unabated. However, the ongoing pandemic and an upcoming recession for the UK are warning signals that short-term traders should not ignore.
|PE ratio (TTM)||14.71|
|Quarterly Revenue Growth (YoY)||-35.10%|
Lloyds share price vitals, Yahoo Finance, 16 June 2020