the Lloyd’s (LSE: LLOY) The stock price is down nearly 7% in the past month. This is despite the Bank of England’s recent interest rate hike and Lloyds’ positive annual financial report. And now, financial services company JP Morgan cut its revenue estimates for European banks by nearly 15% after weighing the economic fallout from sanctions on Russian companies. What does this mean for Lloyds share price recovery? And am I still considering an investment in one of the biggest banks in the UK right now?
JPMorgan’s analysis indicates that the main reason for the downward revision of European banks’ earnings estimates is the “economic ripple effect on Europe” because of the war in Ukraine. But the report also says banks are better prepared for tough times this time around after the market’s reaction to the pandemic. In fact, the investment company said the “the risk-reward ratio of European banks is positive following recent revisions in share prices”.
And despite short-term share price volatility, Lloyds’ annual report looked solid to me. The banking group managed to post a pre-tax profit of £6.9bn, up 462% on 2020. The company recorded a better cost-to-income ratio in 2021 after laying off 4,000 staff . Total loans approved increased by £9 billion and total customer deposits increased by £25 billion compared to the prior year. From the perspective of a potential investor, shareholder returns have also been stable. Earnings per share rose to 7.5p in 2021 from 1.2p in 2020. And after a strong rebound, the group announced a £2bn share buyback and the current dividend yield stands at 4.1%, which should become ex-dividend in less than a month, on April 7, 2022.
Lloyds share price is currently at 48p, trading at a price to earnings ratio of a measly 6.4x. With the boom in the housing industry set to extend into 2022 and the recent rise in interest rates, Lloyds is eyeing an increase in lending income this year. And I think that undervalued share is a big one FTSE100 trading for my long term portfolio right now.
Lloyds share price concerns
Despite my bullish stance, my potential investment also carries some risks. Market volatility, fluctuating commodity prices and government sanctions have already hit UK banks hard. And financial institutions could suffer in the coming months if the Ukrainian crisis worsens. And despite increased borrowing in the country, further interest rate hikes to curb rising inflation could discourage short-term loan seekers and effectively kill the property boom. The banking group’s corporate clients are already liquidating some of their assets to finance inflated operating costs. This could put a strain on the income of Lloyds’ corporate clients. And if inflation increases, individual customers could also benefit from investments.
But despite these risks, the UK’s biggest lender is a proven FTSE 100 bank stock with an above-average yield. The stock could be a solid recovery option for my portfolio provided more economic turmoil sets in, so I would consider an investment if the stock price drops again.
Should you invest £1000 in Lloyds now?
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Suraj Radhakrishnan has no position in any of the stocks mentioned. The Motley Fool UK recommended Lloyds Banking Group. The opinions expressed on the companies mentioned in this article are those of the author and may therefore differ from the official recommendations we give in our subscription services such as Share Advisor, Hidden Winners and Pro. At The Motley Fool, we believe that considering a wide range of information makes us better investors.