Lloyds (LSE:LLOY) shares have tumbled recently. In the fallout from the collapse of Silicon Valley Bank and Credit Suisse, echoes of the 2008 financial crisis are ringing across global stock markets, particularly in the banking sector.
But how severe has the decline in the Lloyds share price been this year? And what’s the outlook for this FTSE 100 bank stock?
Here’s my take.
2023 return
Some recent headlines paint a miserable picture of the difficulties facing banking stocks. With a quick glance at the front pages, I’d be forgiven for thinking UK bank shares had plummeted into the abyss this year.
But is that true? Let’s imagine I’d £1,000 to invest in Lloyds Bank at the beginning of the year. Where would I be now?
With a £1k lump sum at my disposal, I could have bought 2,122 Lloyds shares at the start of January for 47.13p each. To be precise, that stake would have cost me £1,000.10.
As I write, that shareholding would be valued at £973.36 today. Granted, that’s a fall, but considering the abundance of doom and gloom in recent market commentary, I think the bank has held up pretty well.
The share price has fallen less than 3% since the start of the year, and it’s down 6% on a 12-month basis. That said, the five-year return (excluding dividends) isn’t exactly inspiring at -29%.
Will Lloyds shares fall further?
Worries about financial contagion potentially spell trouble for the shares. Climbing interest rates combined with the end of quantitative easing is a difficult cocktail to stomach for banks that don’t properly manage these risks. The spectre of a liquidity crisis looks like a more realistic prospect than at any point in the last decade.
All of these factors point to further potential falls in the Lloyds share price, especially if more banks go under.
However, although this year could be difficult, I’m optimistic about the long-term outlook. The Bank of England has made efforts to calm jittery markets in the wake of the Credit Suisse buyout.
“The UK banking system is well capitalised and funded, and remains safe and sound.”
Bank of England, 20 March 2023
Indeed, Lloyds’ CET1 ratio (which measures a bank’s capital against its assets) is a robust 15.1%. As Britain’s largest mortgage lender, the business is also exposed to long-term growth in UK house prices.
Plus, the valuation looks reasonable to me. With a price-to-book ratio of 0.7, Lloyds falls in line with the industry average.
Granted, there are serious macro risks facing the shares, but for now the bank looks sufficiently resilient to weather the storm, in my view. Big failures in risk management drove Silicon Valley Bank and Credit Suisse into the ground, but as things stand, I don’t see Lloyds going the same way.
What I’m doing
I already own Lloyds shares, and I’m holding on to my stake. Thanks to a 5.27% dividend yield, they’re handy passive income generators for my portfolio.
Given the heightened risks at present, I won’t be buying more shares today. However, I’m not rushing to sell either. Instead, I’m going to wait and see how the rapidly evolving situation unfolds.
