The Lloyds (LSE: LLOY) share price has plunged over the past few months. After hitting a one-year high of nearly 67p per share in April, the stock started falling and hasn’t stopped.
At the time of writing, it has fallen a staggering 27% from the April high, underperforming the FTSE 100 by around 22%, excluding dividends, over the same time frame.
Following this decline, shares in Lloyds are now dealing at a forward P/E of 6.3 and a price-to-book ratio of 0.7, one of the lowest valuations placed on the stock in the past five years. Indeed, the five-year average forward P/E for the bank is around 8.
The big question is, could it be worth snapping up shares in Lloyds today to make the most of this valuation opportunity?
It seems to me that economic concerns are the main reason why investors have been selling the Lloyds share price over the past few weeks.
Brexit uncertainty has weighed on the stock since the referendum in 2016, but now global growth concerns are adding fuel to the fire. Germany, Europe’s largest economy looks as if it is heading for a recession and warning lights are flashing amber around the rest of the world.
Investors and traders are particularly concerned about a phenomenon called the inversion of the yield curve. This is where longer-term interest rates in the bond market fall below shorter-term interest rates, and it has historically been a warning sign that a recession could be on the horizon.
For Lloyds, a global recession coupled with Brexit uncertainty would almost certainly lead to lower earnings. The bank would be hit with higher loan default rates, and if the Bank of England decides to reduce the base rate, Lloyds would have to reduce the interest rate it charges borrowers.
When you take all of the above into account, it is pretty clear that the near-term outlook for the Lloyds share price is pretty uncertain.
However, here at the Motley Fool, we are committed long-term investors and are not too worried about short-term volatility. And from a long-term perspective, Lloyds looks like a desirable investment at the current level.
Over the past decade, Lloyds has transformed itself from a struggling basket case into one of the most profitable banks in Europe. A global recession will impact profitability, but the work management has done over the past decade should ensure the business remains solvent and ready to make a comeback when growth returns.
That being said, there’s a good chance things could get worse before they get better. The Lloyds share price could decline further from current levels over the next 12 to 24 months, depending on the economic environment. So, I would not go all in just yet. Still, if you’re looking for an undervalued banking stock to add to your portfolio today, then I highly recommend taking a closer look at Lloyds. The near-term outlook for the bank might be cloudy, but it has excellent long-term prospects, in my opinion.
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Rupert Hargreaves owns no share 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 2019