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Should you buy the Lloyds share price today?

Roland Head
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The Lloyds Banking Group (LSE: LLOY) share price has delivered a loss of nearly 50% so far this year. That’s double the 25% drop recorded by the FTSE 100 at the time of writing.

Today I want to look at why Lloyds has lagged the market and ask if the bank’s share price collapse could be a buying opportunity for long-term investors.

What’s wrong at Lloyds?

When a FTSE 100 share price falls by 50% in three months, it’s usually triggered by some specific bad news. Lloyds hasn’t yet reported anything like this. The bank’s 2019 results were fairly solid and at the time (20 Feb) the outlook for 2020 was pretty stable.

Of course, a lot has changed since then. And while Lloyds hasn’t yet warned markets of impending losses, investors expect UK banks to suffer a big increase in bad debt as a result of the coronavirus pandemic.

There’s also a second problem. Last week, the UK regulator forced the big banks to suspend their dividends, including final payouts for 2019.

To sum up, here’s the picture at Lloyds. Losses are expected to rise and there will be no dividends until the end of 2020, at the earliest.

I’m not surprised Lloyds’ share price has been falling. But I think we need to keep sight of the bigger picture.

A big test for the banks

No one knows how severe and long-lasting the economic damage will be from coronavirus. But what is clear is that this will be the first real test of banks’ financial strength since the financial crisis.

Let’s not forget the Lloyds needed a government bailout to avoid collapse back then. Understandably, investors are nervous that the bank might be unable to cope this time round too.

On paper, Lloyds’ numbers look pretty good to me. Based on regulatory measures such as the Common Equity Tier One ratio, this bank (and most others) should be able to absorb much bigger losses today than in 2008.

I think the issue is that we don’t yet know how reliable these metrics will be when times get tough. There’s also a second problem — we don’t know how badly damaged the economy will be by the pandemic.

What we can learn from the Lloyds share price

At about 32p, Lloyds’ share price sits at a 37% discount to the bank’s last-reported net asset value of 50.8p per share. Until the end of February, the share price was above 50p.

The falling share price reflects the likelihood that rising losses from bad debts will reduce the bank’s net asset value. My sums suggest that at 32p, the market is pricing in a loss of about 3.5% on all of the bank’s loans.

To put this in context, Lloyds reported an impairment ratio of 0.4% last year.

I think that the financial support being provided by the government should reduce the level of losses suffered by banks. I suspect that Lloyds shares are cheap at current levels. But I really don’t know what’s likely to happen next.

If I held the shares I would probably sit tight. But I wouldn’t rush to buy more at this time.

The post Should you buy the Lloyds share price today? appeared first on The Motley Fool UK.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended 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 2020