The Lloyds (LSE:LLOY) share price hasn’t exactly been a stellar performer in recent years. In fact, since February 2017, the stock has fallen by over 20%.
To be fair, the global pandemic that started in 2020 that wiped out a good chunk of its price. However, over the last 12 months, the stock is up by over 40%. So, is this just a pandemic recovery story? Or is there something else happening under the surface? Let’s explore whether this business belongs in my portfolio.
Investing the Lloyds share price performance
Understanding why the stock plummeted in early 2020 is not exactly difficult. Global lockdown restrictions were put in place, and many non-essential businesses had to temporarily halt or endure disruptions to their operations. With revenue streams disappearing, many of Lloyds’ debtors could not pay the interest on borrowed capital. And consequently, it incurred a whopping £4.2bn loan impairment charge.
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Since then, the economic situation has improved, and money has started flowing back into its coffers. This undoubtedly has contributed to the relatively rapid recovery of the Lloyds share price. However, it’s not the only contributing factor,
Looking at the latest third-quarter earnings report, the bank watched its profit surge to £4.96bn in just the first nine months. By comparison, pre-pandemic profits were only £1.98bn over the same period. What happened?
This rapid expansion in profitability is largely thanks to the elimination of the compensation scheme for payment protection insurance (PPI). With the last of the regulatory provisions finished, operating expenses dropped by a third.
Of course, this is a one-time boost, so I’m not expecting margins to continue expanding at the same level moving forward. But it does beg the question, if profits have more than doubled, then why is the Lloyds share price still lower than 2019 levels?
There are risks on the horizon
The group is set to enjoy some favourable economic tailwinds in the coming months and potentially years. After all, with interest rates being hiked by the Bank of England to tackle inflation, Lloyds’ lending activities are about to become more lucrative.
However, this is a bit of a double-edged sword. With the cost of living on the rise, it could inadvertently trigger knock-on effects to economic growth. If the general financial strength of UK businesses weakens, that’s not good news. Why? Because it may lead to a second round of loan impairments while simultaneously making it harder to issue new loans at low risk.
Time to buy?
Despite the valid concerns surrounding the economic environment, I believe the Lloyds share price is undervalued considering the rapid expansion of its bottom line. Full-year results will be released later this month and will provide a clearer picture of how things are going.
But, given today’s valuation, I’m personally tempted to add some shares to my portfolio ahead of the report as I think the share might rise strongly.
