Does Lloyds share price falling below 40p make it a no-brainer buy?

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Close-up of British banknotes

Lloyds banking group (LSE: LLOY) had a difficult year, as did other financial stocks. And for months I had feared the Lloyds share price would fall below 40p. Well actually more like hoping so I could buy more even cheaper.

It finally happened this week and the 40p barrier was broken.

In a week when the government told us it would not cut spending, but was still cutting taxes, economists around the world may have been pulling their hair out.

Unsurprisingly, stock markets did not react well. And financial stocks were hit again. How far can Lloyds’ share price drop before we really consider a no-brainer buy?

Evaluation

Relying on forecasts is risky. They are often outdated and rarely reflect the latest news. And at the end of this year, so much could have happened to make the predictions seem ridiculous.

But I think they can still be useful, provided we do certain things. One is to check the fundamental strengths and weaknesses behind a forecast. The other is to look for a good margin of safety. Current forecasts have Lloyds shares on a price-to-earnings (P/E) ratio of just six.

And the fall in the share price pushed the dividend yield close to 6%. It’s way ahead of FTSE100‘s 4%, in a year that could see the index’s second-biggest dividend ever.

We also see a price-to-book ratio of around 0.6, which values ​​Lloyds at only around 60% of the value of its underlying assets. Seems crazy to me, provided the balance sheet is healthy

Balance sheet

At the intermediate stage, Lloyds announced a CET1 ratio of 12.6%. That’s a bit down from 13.1% the previous year, but it’s still strong.

In addition, risk-weighted assets had increased by £2.1 billion, to £20.6 billion as of June 30. The results update said “good performance in core businesses, including increased lending combined with higher interest rates and foreign exchange“.

This is one of the reasons why a bank should suffer less from rising interest rates. In fact, this should benefit them, as they help increase credit lines and profits. Total loan volumes may fall, of course, but they did the opposite in the first half of this year.

Risks

Loans could well fall in the second half, and that is one of the risks. And Lloyds recognized an impairment charge of £11m.related to expected credit loss largely influenced by future economic outlook“.

Compared to a £47m impairment credit in the first half of 2021, that’s not brilliant. But £11m isn’t much, and even if impairments increase in the second half (which I expect) I don’t see anything close to the pandemic crisis.

Any threat to the mortgage market is a threat to Lloyds, and that’s a real fear. And it is entirely possible that the bank will cut its dividend in the short term.

The big question is whether there is currently sufficient security in Lloyds’ very low share price. For many, there is clearly none. But, for me, it is, and an add on Lloyds shares is a big possibility for my next purchase.

Does Lloyds share price falling below 40p make it a no-brainer buy? first appeared on The Motley Fool UK.

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Alan Oscroft holds positions at Lloyds Banking Group. 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.

Motley Fool United Kingdom 2022

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