Ahead of Lloyds results due for release this week, a Pepperstone analyst has said the Lloyds share price is unlikely to hit £1 in 2024.
Last week, we outlined the key metrics Lloyds investors should look out for in its Q1 2024 update, including Net interest margin and provisions for bad debts.
However, the wider economic backdrop is likely to cap Lloyds shares in the coming year explains Capital.com analyst Daniela Hathorn, in her own words:
“Shares of Lloyds Banking Group have struggled to find their footing in the past, but the company’s strong fundamentals have made it an attractive investment, and investors are finally catching on. The share price surpassed the 50 pence mark at the end of March for the first time in over a year as appetite for stocks has increased with resilient macroeconomic data. But investors want to know if shares of Lloyds can trade back at £1, a level not seen since 2008.
“Fundamentally, the bank is strong, with a widely recognisable brand and a large customer base. Earnings have remained robust, with post-tax profits at £5.5bn and £3.9bn in 2023 and 2022 respectively. Interest income – a key revenue source for banks – has grown consistently for the past 5 years, increasing 30% from 2019 to 2023.
“Even so, market sentiment has been holding the share price back, resulting in a price-to-earnings (P/E) ratio that makes the company look undervalued. But appetite in the UK banking sector seems to be turning. Interest rates are expected to start dropping soon, which could be a headwind for banks, but it is also expected to boost the wider market, which is likely to reflect on Lloyds share price eventually.
“The issue doesn’t seem to be so much with the company’s fundamentals, but rather with investor concerns about loan defaults if the economy continues to perform weakly. After all, the GDP data confirmed that the UK economy entered a technical recession in the second half of 2023, with two consecutive quarters of negative growth.
“And while growth is struggling, inflation continues to be an issue, especially in the services sector, where there are still upward pressures on wages. Markets now only have one rate cut fully priced in for 2024, a stark contrast to where the year started.
“So, there is reason to believe that investors are nervous about the long-term outlook for the UK economy, and that has an impact on consumers and their ability to pay back loans. For this reason, the likelihood of getting Lloyds shares back up to £1 is pretty slim until the economic uncertainty clears up, and that is unlikely to happen this year.
While Hathorn mentions the constraints on banks in terms of earnings multiples, it’s interesting to note that UK-focused banks have consistently traded at a discount to book value over many years, effectively valuing the stock at less than the sum of their assets, including loan books and other investments.
This represents the wider negative sentiment surrounding UK assets, which alleviated, would have more of an impact on the Lloyds shares price than fractional changes in net interest margins.
Lloyds will report Q1 2024 results Wednesday 24th April.
