Exactly one year ago, I suggested the Lloyds (LSE: LLOY) share price could double investors’ money if a significant second wave of the coronavirus was avoided. We all know how that turned out.
Maybe this suggestion wasn’t too fanciful. After all, Lloyds’ valuation is a lot higher now than it was back then. It’s climbed another 4% in value today, following an encouraging Q1 trading update.
Why is the Lloyds share price flying?
Thanks to an improving outlook on the UK economy, pre-tax profit for the first three months of 2021 came in at £1.9bn. This is clearly a vast improvement on the paltry £74m achieved over the same period in 2020. The latest number also beat market expectations, suggesting the Covid-19 hangover won’t be quite as bad as originally feared.
Loans and advances at Lloyds increased slightly to £443.5bn in the three months to the end of March. As a sign of the UK’s booming housing market, this included £6bn of growth for its mortgage book. On the other side, customer deposits also moved £11.7bn higher to £462.4bn, giving a loan-to-deposit ratio of 96%.
In his final statement before leaving the company for Credit Suisse, CEO António Horta-Osório said the bank had made a “strong start” to 2021. I find it hard to disagree.
Can this continue?
Today’s numbers certainly make me more bullish on the Lloyds share price than I once was. Arguably, the most important snippet from today’s statement was the bank’s decision to raise its full-year guidance.
The FTSE 100 member now expects net interest margin –– the difference between the interest income it makes and the interest paid out to lenders — will now be in excess of 2.45%. Operating costs are also expected to come down by roughly £7.5bn.
This should all be good news for those holding the shares for income. Indeed, Lloyds reiterated today that it intended to resume a “progressive and sustainable ordinary dividend policy.”
Analysts are currently penciling in a 1.68p per share total return for FY2021. With the Lloyds share price at 45p, as I type, that gives a yield of 3.7%. Yes, more can be made in other FTSE 100 stocks but that’s still a decent payout.
Cautiously optimistic
As an investor primarily focused on growth, I’ve never been a fan of bank shares. The poor share price returns over recent years hardly inspire confidence. By contrast to the traditional view of banks being safe investments, events like the Great Financial Crash and PPE scandal also show how risky investing in this space can actually be.
Those risks remain. While the UK’s vaccination programme is going swimmingly, only a fool (rather than a Foolish investor) would assume that there won’t be setbacks ahead. As Lloyds’ departing leader remarked, “the outlook remains uncertain.”
A third wave certainly can’t be ruled out. While currently buoyant, the housing market could also lose a bit of steam once the Stamp Duty holiday given to buyers ends in June.
Nonetheless, today’s numbers (and subsequent market reaction) lead me to suspect that recent momentum in the Lloyds share price will continue. Trading on a little under 9 times forecast earnings, it certainly looks cheap. This is supported by a low price-to-book value of just 0.63 (under 1.0 generally implies value).
If I were to buy bank shares today, would I buy LLOY? I think I would.
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More reading
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Paul Summers has no position in any of the shares mentioned. 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.
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