Lloyds (LSE: LLOY) shares combine a brilliant dividend outlook with a dirt cheap valuation, but any investor tempted by today’s price of 44p must ask themselves one key question. If the FTSE 100 stock is so great, why does it keep falling?
Inevitably, Lloyds took a hammering after the financial crisis. Over the last five years, when it should have been in full recovery mode, its shares have fallen another 29.57%. I bought them six months ago, thinking they were terrific value at less than 50p, but they’ve fallen almost 10% since.
The wrong direction
Lloyds shares up just 2.57% over the last year, a period when they enjoyed one massive tailwind. More than a decade of ultra-low interest rates had compressed net interest margins, the difference between what banks pay savers and charge borrowers. Now the wind is blowing the other way.
Over the past 18 months bank rate has rocketed from 0.1% to 5% with more to come, yet Lloyds shares continue to flounder.
It’s not as if the bank isn’t making money. Q1 profits before tax up £611m to £2.07bn year-on-year. Net interest income jumped 21% to £3.54bn, “driven by stronger margins and higher average interest-earning banking assets”, the bank said.
In 2022, Lloyds made £13.1bn from net interest margins of 2.94%, up 18% in a year. In 2023, it expects margins to be even wider at 3.05%, suggesting even bigger revenues to come. The big banks are taking flak for hiking mortgage rates much faster than savings rates, which is bad for customers, of course, but good for business. Or it should be.
One downside is that customers are voting with their feet and seeking better savings rates from smaller ‘challenger’ banks. Customer deposits fell by £2.2bn to £473.1bn, partly for seasonal reasons but also due to the more competitive savings market.
A bigger concern is that debt impairments will rise as the mortgage crunch bites, while the government forces banks to go easy on troubled borrowers. In Q1, Lloyds increased its bad loan provisions to £243m, and we can expect that to rise.
The banking crisis also hit the sector, of course, although Lloyds suffered only light damage as it now shuns risky investment banking. The troubled UK economy is the biggest concern, as Lloyds is primarily a UK operation and will suffer as inflation proves stickier here than elsewhere.
I’m still keeping the faith
When I bought Lloyds shares last October (and again last month), my aim was to hold them for years and ideally decades. As a result, I don’t need its share price to rocket in the short term, in fact I will benefit if it the recovery takes time, as my reinvested dividends will pick up more stock at today’s low price.
With a forecast yield of 6.39% this year and 7.02% in 2024, I’ve locked into a fantastic rising income (although dividends are never guaranteed). Today’s valuation of 6.01 times earnings makes me want to buy even more Lloyds shares, and I would, if it wasn’t already my biggest single stock portfolio holding.
I’ll still be holding my Lloyds shares long after today’s profiteering accusations fade from the headlines. I won’t be depositing cash in any of its savings accounts, though.
The post Big banks accused of ‘profiteering’, but at 44p I’d still buy Lloyds shares like a shot appeared first on The Motley Fool UK.
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Harvey Jones has positions in Lloyds Banking Group Plc. The Motley Fool UK has recommended Lloyds Banking Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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