Lloyds (LSE: LLOY) shares have been a disappointment this year. They began 2022 trading at 49.9p, but stand at 43.4p today, a drop of 13% (and an almost 7% fall over 12 months). By comparison, the FTSE 100 as a whole is down just 3.95% this year.
Rival Barclays has fared even worse, though, falling 18.96% year-to-date. These are tough times for the banking sector, as the cost of living crisis squeezes business and personal customers.
I like buying out-of-favour stocks with long-term resilience, and Lloyds Banking Group fits that profile, but there are risks.
Lloyds shares look cheap to me
Lloyds is particularly exposed to the troubled UK economy, as it divested of most of its foreign operations after the financial crisis. Yet it could also benefit from today’s economic worries.
Low interest rates have dragged on banks for years, making it almost possible to widen their net interest margins, the difference between what they pay savers and charge borrowers. That is changing fast, with Lloyds’ Q1 margins climbing to 2.68%, up from 2.49% the year before.
Its margins should widen further as the Bank of England hikes base rates, allowing Lloyds to increase mortgage rates faster than savings.
The cost of living crisis may also benefit the bank, as customers borrow more on credit cards and other costly short-term debt. The danger is that it might not work out so positively for the group. The housing market may slow, as Lloyds, which owns Halifax, is the UK’s biggest mortgage lender. Struggling borrowers may also fall into arrears and default, driving up loan impairments.
In April, Lloyds posted better-than-expected first quarter profits of £1.6bn, albeit down from £1.9bn year-on-year.
The dip was largely due to the bank setting aside £177m to cover inflation-fuelled loan defaults. Last year, Lloyds released £360m that it had put aside for Covid-related impairments, as the economy recovered faster than expected.
I think the economy is in for a rough few months, with the UK likely to fall into recession. The gloom should extend into 2023, as high winter energy prices wreak havoc. Share prices tend to revive ahead of the economic recovery, but Lloyds could struggle for the rest of the year.
I’d buy this FTSE 100 stock
Despite that, I would buy Lloyds shares today. Today’s troubles looked priced in, with the stock trading at 5.7 times earnings. The bank also pays generous dividends, with a current yield of 4.6%, forecast to yield 5.4%. The sooner I lock into that income stream, the better.
In February, Lloyds launched a £2bn share buyback programme, and that should give me some consolation for any share price sluggishness. It also suggests that the Lloyds board feels its shares are undervalued, so this can be seen as a vote of confidence in its long-term trading prospects.
Nobody can say for sure whether when the recovery will come. But I only ever buy shares that I would hold for a minimum of five or 10 years, and preferably much longer. On that timescale, I think it is a safe bet for me to buy Lloyds shares today.
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Harvey Jones doesn’t hold any of the shares mentioned in this article. 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.