£5,000 invested in Lloyds shares in August 2020 is now worth…
One share in Lloyds Banking Group (LSE:LLOY) is now (20 August) worth nearly twice as much as it was in August 2020, when Covid-19 was wreaking havoc on the world. Someone clever enough to have invested £5,000 at the time would now be sitting on a stake worth £9,836. In addition, they would have picked up £1,285 in dividends. Overall, thatâs a 122% return.
However, the bankâs share price was relatively flat for much of this period. Itâs only started to climb significantly since the start of 2024. With nearly all of its earnings being derived from the UK, it’s not surprising that Lloyds’ fortunes are closely connected to the performance of the domestic economy, which has struggled for most of the past five years.
Post-pandemic inflation and the cost-of-living crisis dented consumer sentiment. Investors also saw better opportunities outside the country. But once the Bank of England started to cut interest rates, price rises eased and the economy began growing again, the Lloyds share price benefitted from improved earnings and renewed investor optimism.
Uncertain times
Unfortunately, recent economic data presents a more confused picture. Growth during the second quarter of the year exceeded city expectations but inflation, unemployment and government borrowing are all moving in the wrong direction.
This could be an indicator of trouble ahead for the bank. An economic downturn would increase the risk of loan defaults and damage the groupâs earnings. As of 30 June, Lloyds made a provision in its accounts for expected credit losses of £3.402bn. This is equivalent to 0.72% of its gross loan book.
However, under a âsevere downsideâ scenario, this would be £5.807bn — £2.405bn more. If a provision of this level was made, it would reduce the bankâs expected profit for 2025 by 55% and, I suspect, lead to a cut in its dividend.
| Scenario | Expected credit losses (£bn) | Weighting (%) |
|---|---|---|
| Probability-weighted (actual provision) | 3,402 | – |
| Upside | 2,578 | 30 |
| Base case | 2,995 | 30 |
| Downside | 3,831 | 30 |
| Severe downside | 5,807 | 10 |
Not that bad
But I donât think even the most pessimistic economist is expecting the assumptions used in this scenario to become reality. This model assumes GDP growth of 0.1% in 2025, a contraction of 3% in 2026 and a flat 2027.
However, as expected of a reputable business, I think Lloyds has been prudent in coming up with its estimate of bad and doubtful loans. Its probability-weighted forecast includes 10% of the severe downside result. So while I believe the UK economy remains fragile, I think the bank has already reflected this in its calculations.
It also appears to have dodged a bullet with the recent ruling by the Supreme Court. Previous estimates had suggested that the alleged mis-selling of car finance could cost the industry up to £44bn. Itâs now likely to be £9bn-£18bn. Through its Lex Autolease and Black Horse Motor Finance brands, itâs believed that Lloyds has a 20% market share.
However, I still donât want to invest.
The recent share price rally means its historical price-to-earnings ratio is the highest of the FTSE 100âs five banks. Its price-to-book ratio is beaten only by NatWest. And although its dividend yield is above the index average, itâs still lower than that of HSBC and NatWest. Personally, I think there are better (that is, cheaper) opportunities for me elsewhere.
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HSBC Holdings is an advertising partner of Motley Fool Money. James Beard has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings and Lloyds Banking Group Plc. 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.
