Lloyds Bank (LSE: LLOY) shares have been one of the best performers of the FTSE 100 index in the last three months. The stock rose 35% during this period. However, investors who bought the stock a year back around this time have lost 40% of its value.
The bull case for Lloyds Bank shares
Lloyds Bank has a very good branch network in the UK. I believe its focus on digital banking is the right direction for the bank in the long term. It had 17.1 million digital active users and 12.1 million active mobile app users at the end of the third quarter ending 30th September, 2020. Customer satisfaction is good as the digital net promoter score grew to 69% from 64% during the same period.
The banking sector stocks are cyclical in nature. When the economy starts improving, I believe the banking sector will be one of the early winners. This can arguably already be seen in the past few months, when most of the UK financial sector stocks have been performing well.
The bank has a stable balance sheet: CET1 ratio is improving. This improved from 13.8% at the end of December 31, 2019, to 15.2% at the end of Q3.
The bank’s operating costs are reduced due to the continued digitalisation and other process and organisational improvements. For the full-year 2020, management believes that the operating costs will be below £7.6bn in 2020. This is lower than the operating costs of £7.9bn in 2019.
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The bear case
Lloyds Bank shares’ profits are more tied to the UK economy. With the lockdown, and since many businesses are closed, the bank’s revenue is negatively affected. The bank’s other income was down 23% to £3.4 billion. In my opinion, this trend might continue in the near term due to the national lockdown.
The low-interest environment is not beneficial for Lloyds Bank. In the year-to-date September 2020, net income was down 17% to £10.8bn.
The bank’s risk-weighted assets increased by £1.9bn primarily due to the increases from credit risks for the nine months ended September 2020 and would continue in Q4. Optimisation of the Commercial banking portfolio could offset some of these risks. However, it could have a fuller impact in 2021 depending on the economic situation.
The Bank of England’s Prudential Regulatory Authority has given the green signal to the banks to restart dividends in 2021. However, there are some restrictions on the dividend distribution based on the bank’s risk-weighted assets and combined profits of 2019 and 2020. According to the analysts at UBS, Lloyds could see a maximum yield of 1.6% while Barclays might yield up to 3.2%.
The UK GDP reported an estimated 2.6% monthly decline in November 2020 according to The Office for National Statistics. However, this is better than the economists forecast of a 5.7% decline. I would wait to get more clarity on the disruption caused by the lockdown to buy Lloyds Bank shares, which is more UK centric, and would prefer a more diversified bank like Barclays in my portfolio.
The post Should I buy Lloyds Bank shares for my long-term portfolio? appeared first on The Motley Fool UK.
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Royston Roche has no position in any company mentioned. The Motley Fool UK has recommended Barclays and Lloyds Banking Group. 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.
Motley Fool UK 2021