Is Lloyds A Buying Opportunity?

Published in Company Comment on 20 June 2011

The bank is cheap, but could it become cheaper?

As an investor I am, by my nature, a contrarian. I look for shares which have been beaten up, trashed and generally talked down. If a stock is out of favour and the background noise from investors is overwhelmingly pessimistic, I take an interest.

Bombed out

I can't think of a sector which is more bombed out currently than banking. In particular, Lloyds Banking Group (LSE: LLOY) has caught my attention.

We all know the story of the devastation that the credit crunch and the collapse of Lehman Brothers wreaked on the UK's banking sector. Before the crisis the then Lloyds TSB traded at around 260p. At the bottom of the stock market crash, it fell to 20p. It then gradually recovered to a high of 77p in September 2010.

At that point you might have thought that the worst was past and that banking stocks would steadily increase in value. In fact many people felt that the banks would be one of the big recovery plays of 2011.

Another setback

How wrong they were. Instead, there has been a torrent of bad news. In particular, Lloyds reported a loss of £3.5bn for the first quarter of 2011 after making a £3.2bn provision for mis-selling claims by customers who took out payment protection insurance.

Having made a profit of £2.2bn in 2010, this loss looked like a backward step for the company. This clearly was the market's view, as the share price took a pounding, falling from 77p to 48p, where it currently languishes as I write this article.

The stock now trades below book value. However, I am wondering whether the rather bipolar Mr Market has fallen into one of his depressive moods.

Certainly I suspect that there is more than an element of 'kitchen sinking' by new chief executive Antonio Horta-Osorio, who took over from Eric Daniels on 1 March.

And other numbers indicate a more optimistic picture. The bank's core business showed growth as customer loans and deposits rose from £842bn to £848bn. According to Ralph Silva, banking analyst at SRN, "The bank as a whole appears to be getting better and appears to be taking a larger market share".

Yes, it is true, the bank will have to dispose of over 600 branches, but we have known this for some time. And there has been talk of ring fencing retail banks from 'casino banking', but as Lloyds does not have a major investment banking arm it won't be affected by this increased regulation.

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The elephant in the room

However, having discussed all these possible negatives, the one elephant in the room is Europe's sovereign debt crisis. Greece seems to be heading inexorably to a default of some description, even if it is euphemistically termed a 'restructuring' or 'reprofiling'.

When this happens, the secondary effects will be hard to predict. Even if Lloyds does not have a big exposure to Greek debt, there is the possibility of contagion spreading through the markets. If this happens, all bets are off.

So if you do buy into Lloyds, you need to do so with your eyes wide open. This is a risky play, but could potentially be very rewarding.

My personal view is that there will be no 'Lehmans moment' which causes stocks to come crashing down as they did in 2009. Greece's problems have been too well signposted for the markets to be shocked.

Instead, I suspect Europe will muddle through with a limited, managed restructuring. Until this is done stocks will continue to edge downwards as they have been doing recently, and buying opportunities, such as the one for Lloyds, will start to appear.

Could Lloyds fall further? Well, undoubtedly. But the fact that the share price has held firm in the past couple of weeks as rumours of a Greek Tragedy have swirled round the markets suggests that we may be close to the bottom. And if there is better news from the 30 June update, the stock could even start an upward climb. However, timing the market is as much a matter of luck as judgement.

Looking at the big picture, the optimist in me sees the future potential of this group, with huge market shares in the UK in current accounts, savings, investments and mortgages. This company will, eventually, become one of the UK's biggest and, dare I say it, most profitable banks.

As for myself, I have put my money where my mouth is by buying into Lloyds. I see this as a long term play, and I hope to reap the rewards in several long years rather than in a few short months.

More from Prabhat Sakya:

> Prabhat owns shares in Lloyds Banking Group.

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Comments

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oakwood2002 20 Jun 2011 , 8:10am

Definitely agree that this is a buying opportunity. Short term may be a little bumpy, but in the medium term there is only one way the share is going to go from here.

UncleEbenezer 20 Jun 2011 , 9:05am

When was it ever 260p?

It plunged straight from well above that to below on the news of the suicide pill called HBoS.

TMFTigger 20 Jun 2011 , 9:47am

Hi UncleE

I think that 260p is the price if you adjust for the rights issues over the last few years. If you look at a 5-year chart, you'll see that's how it's displayed.

Stuart

UncleEbenezer 20 Jun 2011 , 10:20am

TMFTigger: that would explain the "20p" and "77p" figures that never happened. But comparing pre-suicide LLOY with anything that's happened since seems, to say the least, very dubious.

(I held LLOY at the time this all started - and managed to make a profit on it :-)

ps200 20 Jun 2011 , 9:34pm

Hi UncleEbenezer,

Mea culpa regarding the prices; as Stuart says, I just took the prices from the 5-year chart. I must admit I'm not an expert on the various rights issues that took place in the past few years.

As for comparing pre-crisis Lloyds to post-crisis Lloyds, of course these are completely different beasts. All I wanted to do was to illustrate how far the value of the company had fallen.

Congrats for making a profit on LLOY too - I suspect you are one of very few!!

Prabhat.

DIYIncome 21 Jun 2011 , 8:13am

Still holding, with gritted teeth - logic tells you LLOY must come back - but when?

jasonjarvisgbr 21 Jun 2011 , 4:27pm

Impossible to value - simple as.

The troubling thing is that the market seems to be pricing in a very bleak future and I suspect someone out there knows a bit more about their true exposure to bum debts than they are letting on .


MrBearBull888 22 Jun 2011 , 9:51pm

Lloyds is a buy. But don't ask me when it will come good.

The HBOS merger lays at the feet of Mr No More Boom and BUST and please buy the UK's gold at peanuts for US$250 and at the same time the stealth raider on UK Pensions.

The New very clever MD from Santander has come in not to shut Lloyds but to turn it round and no doubt he will do just that and in time build it back to where it was a prime bank.

But it will take time.

Oh in the meantime if Mr Bust heads the IMF im moving to the Moon.

LeeJG 28 Jun 2011 , 12:44pm

Bought at 64.7 so awaiting a recovery in the next year or two (or more).

Abelkrugs 04 Nov 2011 , 3:37pm

Just bought a load at 28.5p - I keep thinking that they can't get any lower, but I do have a very nervous feeling in my stomach!!

anu23278 18 Nov 2011 , 3:49pm

I've boughted 26.67p yesterday morning. but yesterday and today it went down again. so i don't know when will rise?

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