Will Lloyds shares recover or are they dead money?

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Lloyds (LSE: LLOY) shares have underperformed for a long time now. Over five- and 10-year horizons, they’re down about 25% and 45% respectively. So what’s the deal with the shares? Will they ever recover? Or are they dead money?

Big challenges

When I look at Lloyds today, I see a company facing some pretty big challenges. One is the economic environment in the UK.

Higher interest rates are normally good for banks. This is because they allow banks to earn a larger spread between their lending and borrowing rates.

However, when rates move sharply – like they have in the UK over the last 18 months – they can end up hurting banks. That’s because borrowers often struggle with the higher lending costs and end up defaulting on their loans.

Given how high UK interest rates are today, and the fact that the British economy is generally quite weak, I’m concerned that Lloyds – which is the UK’s largest mortgage lender – could be set to see a wave of loan defaults in the near term. This could hit profits.

It’s worth noting that for the first half of 2023, the bank posted an impairment charge of £681m compared with a £364m charge for the first half of 2022.

Banking has changed

Another major challenge the bank faces is the high level of competition from new digital banks and FinTech companies such as Revolut, Monzo, Marcus, Chip, Chase, and Wise.

There is so much competition in the banking space now and it’s hard to see how Lloyds can compete effectively when other players are offering a) much higher interest rates on savings accounts (Lloyds currently offers 1.4% on its ‘Easy Saver’ account vs 4.6% for Marcus), b) lower fees (eg international money transfers), and c) much slicker apps.

Ultimately, advances in financial technology are disrupting the banking industry in a major way, and there’s a chance that Lloyds could be left behind.

A decent dividend

Now, the good news is that the shares are cheap. At today’s share price, Lloyds has a price-to-earnings (P/E) ratio of 5.6 and a price-to-book (P/B) ratio of 0.6.

These figures suggest the stock is undervalued meaning it could bounce if the outlook, and sentiment towards the company, improves.

Another plus is the dividend on offer. Currently, Lloyds shares sport a yield of around 6.7%.

So even if the share price was to go nowhere in the years ahead, the shares could still provide solid returns (assuming the price didn’t fall further).

Given this yield, I don’t see them as dead money.

Better stocks to buy?

As for a recovery in the share price though, it could be a while off (if it ever comes) given the challenges the company is facing.

In light of this view, I think there are much better stocks to consider buying today.

The post Will Lloyds shares recover or are they dead money? appeared first on The Motley Fool UK.

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Edward Sheldon has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group Plc and Wise Plc. 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.

Motley Fool UK 2023