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Can Lloyds’ share price shake off the banking turmoil?

Lloyds’ share price has taken a pummelling as the banking sector crisis intensifies. Silicon Valley Bank (SVB) and Credit Suisse triggered the market turmoil, which has spilled over to other banks. Yet Lloyds, with its focus on the UK retail market, is a different beast compared to SVB and Credit Suisse.

Having spent most of 2022 in the doldrums, Lloyds’ [LLOY.L] share price finally broke through the 50p level in mid-January. The stock then spent most of February trading between 50p–54p.

However, since the start of March, Lloyds’ share price has been on a downward trend, to close Friday 24 March at 45.72p. The losses intensified last week with Lloyds down 2.42% on Friday, as the fall-out from Credit Suisse and SVB continued. But, should the market calm, can Lloyds’ share price recover?

Should investors compare Lloyds to Credit Suisse?

They are all banks, but it is difficult to compare Lloyds with Credit Suisse or SVB. Credit Suisse failed due to a series of scandals, management changes and huge losses. In 2022 the Swiss bank’s losses amounted to 7.3bn Swiss francs, and it signalled 2023 would see further losses. SVB came undone due to its focus on the US tech sector and exposure to government bonds.

Former Lloyds leader António Mota de Sousa Horta-Osório had been brought in to sort out the mess at Credit Suisse, only to resign as chairman at the Swiss bank after violating Covid restrictions.

Lloyds is a different beast from both of these failed banks. In 2022 it recorded a £5.6bn profit and rewarded shareholders with a final dividend of 1.6p a share. That doesn’t mean Lloyds’ share price is immune from what’s happening in the wider banking sector. But as a bellwether of the UK economy, it faces a different set of headwinds. The UK entering recession, the growing cost-of-living crisis and any downturn in the housing market would have the potential to drag on Lloyds’ share price over the long term.

How safe is Lloyds?

While recent market turmoil conjures up memories of the financial crisis, the major UK banks operate in a fundamentally different world than they did during 2008-09.

Banks are better capitalised as a result of regulatory changes since the crisis. One precautionary measure brought in is the Common Equity Tier that compares a bank’s capital against its assets. Lloyds has a CET1 ratio of 14.1%, according to its 2022 annual financial results. Lloyds also set aside £1.5bn in impairment costs last year to safeguard against bad loans should the cost-of-living crisis worsen.

In a recent research note, Liverpool-based analysts Shore Capital remains confident in the strength of UK banks. The analysts suggest that UK commercial banks are better equipped to withstand any economic downturn thanks to better liquidity and capital following a decade of tighter regulation.

Where next for Lloyds’ share price?

Man Group CEO Luke Ellis doesn’t see the crisis being over just yet. He says “a significant number of banks will not exist 12, 24 months from now that exist today.”

Speaking at the Bloomberg Invest conference in London on Wednesday 22 March, Ellis noted smaller regional banks in the US and UK challenger banks were at risk. Ellis made the point that today people can move money between banks easily using mobile banking apps. And in moments of stress customers are likely to use bigger, government-backed banks. If this proves correct, then Lloyds might benefit, seeing as it is the UK’s biggest mortgage lender.

Ultimately, investors will need to decide whether the downturn in Lloyds’ stock caused by the recent banking crisis represents a chance to buy the stock at a discount. The flipside is that a prolonged crisis means Lloyds’ stock faces continued pressure and investors would be better off steering clear of the sector.

Lloyds’ share price has a median price target of 64p. Hitting this would see a 40% upside on Friday’s close.

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