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It’s been a dire five years for Lloyds (LSE: LLOY) shares. Yesterday (22 February) its woes were compounded as the stock fell a further 1.7% following the release of its 2023 results.
The Black Horse Bank is a staple in my portfolio. And while its shares have been trading at beaten-down prices, I’ve slowly been building up my position.
As I write, they sit at 45.6p a piece. They couldn’t get any cheaper, could they?
Let’s break it down
I’m intrigued to see what’s fuelled this latest drop. Pre-tax profits jumped 57% to £7.5bn. Surely the share price should be heading in the other direction.
Well, the main driving force behind the decline was the £450m that the business has been forced to put aside for potential fines and compensation following an investigation from the Financial Conduct Authority (FCA) surrounding car finance commission arrangements.
While Lloyds has stated that there remains “significant uncertainty” surrounding the extent of the fines, clearly investors weren’t best pleased. Of all UK banks, Lloyds has the largest exposure to any potential penalty.
A buying opportunity?
So, that’s not the greatest news. But is this just the market overreacting? It was previously suggested Lloyds could face fines of up to £1bn, so £450m may not be too bad. Does that mean its drop is now a buying opportunity?
There are two things that spring to mind straight away that make me think it is.
First, it looks cheap. It trades on just 6.4 times earnings. That’s below the FTSE 100 average of 11. I think there’s value to be had there.
Coupled with that, it yields an impressive 7.4%. That trumps the Footsie average of 3.9%. With the dividends I’ve received from my Lloyds stock, I’ve been buying more shares.
For 2023, its dividend rose 15% to 2.76p per share. Lloyds also announced a new share buyback programme of up to £2bn.
Interest rates
There’s also the issue of interest rates to ponder.
Its net interest margin jumped to 3.11% in 2023, up 17 basis points from last year. As such, its net interest income rose 5% to £13.8bn. That’s a direct effect of higher interest rates benefitting the bank. However, hiked rates for the foreseeable future could see further defaults as customers struggle to repay loans.
What’s more, the firm predicts growth in the UK economy this year. But only a modest 0.5%. With it relying solely on the UK for its revenues, this could spell trouble. That’s especially true since the UK recently entered a recession.
Can they fall further?
But could Lloyds shares get any cheaper? Well, maybe. But they look pretty cheap to me now. And I plan to capitalise on that.
Of course, there will be lots of uncertainty surrounding the business going forward. Until we know the true extent of the FCA investigation, the real figure Lloyds will have to fork out is anyone’s guess.
But at its current price, I think Lloyds could be too good for me to turn down. I’m keen to buy some more shares in the coming weeks.
