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It may be one of the UK’s best known-banks, but Lloyds (LSE: LLOY) has seen its shares sell for pennies for a long time. That has been the case for 17 years. The Lloyds share price fell below £1 during the financial crisis in 2008 – and never regained its former heights.
Still, after a 41% increase over the past year, the share clearly has strong positive momentum. Could it keep going and hit £1?
What moves bank shares
As a general rule, bank shares tend to do well when the bank is performing strongly and the economic outlook does not look threatening for that performance.
If the bank’s performance is weak, or the economy looks set to worsen, often the shares will suffer. It is no coincidence that the last time the Lloyds share price stood above £1 was before the last big financial crisis.
Lloyds is doing well
So, how does that analysis help explain the past year when it comes to the Lloyds share price?
As a business, one of the big risks hanging over Lloyds (among other companies) was the potential cost of compensation related to vehicle financing mis-selling claims. That has become clearer over the past year following court decisions.
The scandal has still taken a chunk out of Lloyds’ profits, with a provision totalling £1.2bn. But the ultimate cost now looks like it may be lower than some investors had feared.
Meanwhile, business has been holding up well. Statutory profits after tax rose 4% year on year in the first half to £2.5bn.
Here’s my concern
As I explained above, though, how a bank performs is typically only one of two key factors that influence its share price.
Another is overall economic performance. If the economy does badly and enough people default on their loans, that can be very bad news for bank shares. Again, the Lloyds share price fall in 2008 illustrates this point.
As the country’s largest mortgage lender, that risk is certainly salient for Lloyds (though few banks escape unscathed from a banking crisis).
For now at least, that does not seem to be bothering Lloyds too much. In its interim results, it spoke of its ‘robust asset quality’. So far so good. That said, while it mentioned that the retail business was performing well, that was more than offset by higher default charges from commercial banking.
Lloyds pointed to “a small number of individual cases moving to default” in its commercial portfolio, but that still does not sound like promising news to me. It could be the thin end of the wedge in a lacklustre UK economy.
The share could move higher
Still, broadly speaking, Lloyds continues to perform well. Its price-to-earnings ratio of 12 looks reasonable, although its price-to-book ratio of over one is looking less attractive in my view. I see no strong reason for it to sell over book value, despite its strong brands and large customer base.
On that basis, unless it reveals unexpectedly positive news of its financial performance, I see no justification for the Lloyds share price to hit £1 soon.
It could do so, for example, if the economic outlook brightens strongly. But, to my mind, the current valuation is not an obvious bargain. I have no plans to invest.
