Lloyds’ (LON: LLOY) shares have underperformed in recent years. Today, the shares are changing hands for just 42p – around 27% below the level they were trading at five years ago. At this stage, many investors are probably wondering just how low the Lloyds share price can go. So, let’s examine the outlook for the stock. Is there further downside on the cards?
Today, Lloyds shares look cheap from a valuation perspective.
At present, the bank has a price-to-earnings (P/E) ratio of less than six and a price-to-book (P/B) ratio of about 0.6.
These multiples suggest that Lloyds shares are undervalued right now.
However, undervalued stocks can still fall. Sometimes, cheap stocks get even cheaper.
Looking ahead, the strength of the UK economy is likely to be a major driver of the Lloyds share price.
As a UK-focused bank, Lloyds is essentially a proxy for the UK economy. When the economy is strong, its share price tends to rise. Similarly, when the economy is weak, its share price tends to fall.
If UK economic activity – which has been weak recently – picks up from here, Lloyds shares could potentially move higher. However, if economic conditions continue to deteriorate, we may see Lloyds shares fall below 40p.
It’s worth noting here that the Institute for Fiscal Studies (IFS) recently warned that Britain will slump into a ‘moderate’ recession in the first half of 2024. A recession could have a negative impact on Lloyds’ share price.
A lot will also depend on conditions in the UK housing market as Lloyds is the UK’s largest mortgage lender.
Right now, many homeowners are struggling with their mortgage payments as a result of the recent increase in interest rates. So, Lloyds could be set to see a spike in loan defaults going forward (for H1 Lloyds posted an impairment charge of £681 million compared with £364 million a year earlier).
If Lloyds were to see a wave of defaults and its profits took a hit, there is a chance that the Lloyds share price could fall below 40p. In this scenario, we could be looking at a LLOY lower share price of 35p, or even 30p.
If conditions in the UK economy and housing market were to stabilise from here, however, I’d be surprised if the Lloyds share price fell much below the 40p level.
- For a start, the Lloyds stock price valuation is already very low, as I mentioned earlier.
- Secondly, from a technical analysis perspective, 40p looks like a level of support on the chart for Lloyds share price lows.
- Third, a drop back to the 40p mark would most likely attract income investors. If Lloyds shares fell to 40p, we would be looking at a dividend yield of around 7% here – about twice the average FTSE 100 yield.
As for whether we will see this scenario, however, I am not super confident about Lloyds shares. Right now, there is a lot of economic uncertainty.
