The Lloyds (LSE: LLOY) share price roared back above 40p in March as the outlook for the UK economy continued to improve.
I think this trend could continue. As the country begins to open up again after the pandemic, and businesses, as well as consumers, start spending again, Lloyds could be one of the primary beneficiaries.
Recovering economy
This time last year, as the coronavirus crisis was beginning, economists and City analysts were rushing to try to figure out how much the crisis would cost. There was alarm in the City and speculation that the crisis could cause several banks to collapse.
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Luckily, the crisis turned out to be nowhere near as bad as expected. No bank collapsed, and while government borrowing has ballooned, a full-blown economic depression has, at this point, been averted.
The outlook for the UK economy has improved dramatically over the past few months. Many economic performance indicators have outperformed expectations. I think this has been the primary driver of the Lloyds share price recently.
As one of the largest banks in the UK, Lloyds should prosper if the economy is doing well. I think this suggests that the lender could report strong growth in 2021.
While the pandemic is not over yet, and there may still be financial repercussions, Lloyds has performed incredibly well up until this point. Despite setting aside £4.2bn for credit losses linked to the pandemic, the lender returned to profit in the fourth quarter of last year. It earned a pre-tax profit of £1.2bn for the year.
Strong mortgage lending was one of the bright spots at the bank last year. Lloyds grew its house lending business by over £7bn.
The group’s balance sheet is also more robust than it was at this point last year.
Lloyds share price investment
I think all of the above provides solid foundations for the group to return to growth in 2021. Indeed, analysts have already pencilled in a net profit of £2.9bn for 2021, rising to £3.4bn in 2022. Of course, these are just estimates, and the bank is not guaranteed to hit these earnings targets.
Still, with the outlook for the bank improving, I think the Lloyds share price can continue to increase in value in 2021. The stock is currently trading at a price-to-book value of 0.6, which seems unreasonable. In theory, profitable businesses should trade at or around book value. On a per share basis, the stock’s book value stands at 69p.
Considering all of the above, I would buy Lloyds for my portfolio today.
However, this might not be suitable for all investors because the group is facing some significant risks. Low-interest rates could hurt its profit margins for the foreseeable future. If the UK economic recovery does not live up to expectations, Lloyds would be one of the first to feel the heat.
Some investors may also want to avoid financial institutions because they can be challenging to analyse, and we never really know exactly what’s on their balance sheets.
Despite these risks, I think the Lloyds share price is undervalued and looks attractive as an investment.
