Can I bank on Lloyds shares recovering or is it dead money?

Young black man looking at phone while on the London Overground

Lloyds (LSE:LLOY) shares are down a sizeable 23% over the past 12 months. Having reached nearly 54p last February, the stock plummeted as the Silicon Valley Bank (SVB) fiasco sent shockwaves through the financial world.

Despite no connection to SVB, or poorly-run Credit Suisse which also ceased to be in March 2023, Lloyds shares — like its peers — never truly recovered. Of course, this is also because interest rates continued rising in last year.

Dead money?

The SVB fiasco was a disaster for Lloyds investors. Shares in the UK-focused bank plummeted despite having no resemblance to the failed American institution. The issue however, is that investor sentiment tanked.

So can that sentiment be turned around? Of course it can. This may be triggered by cuts to the Bank of England interest rate — which are far above optimal levels for commercial lenders — or earnings beats.

It’s also worth noting that analysts’ forecasts suggest Lloyds shares should be trading above their current levels anyway. Forecasts are for earnings per share of 7.26p in 2023, 6.43p in 2024, and 7.22p in 2025.

In turn, the average share price target is 59.9p. This is 43% above the current level. Clearly, there’s some opportunity here.

For me, the important part is the metrics. Valuation metrics help me understand whether a company’s trading above or below where it should be.

The forward price-to-earnings ratio is 5.16, that’s a 50.2% discount to the sector average. The price-to-earnings-to-growth ratio (based on five-year growth) is 0.67 — representing a 49.7% discount to the sector average.

The dividend

It may be easy to get carried away with the potential for share price growth. So it’s important to remember that Lloyds pays a really strong 5.8% dividend yield.

Moreover, this yield looks very sustainable. In fiscal year 2022, the dividend payment was covered 3.04 times by net earnings. Normally, a ratio above two is considered healthy.

The dividend should be stronger again this year, with the interim dividend already rising from 0.80p to 0.92p.

The bottom line

Lloyds shares have been rattled in recent weeks following the announcement that the bank could face a potential £2bn fine as the Financial Conduct Authority (FCA) investigates practices around motor loan commissions. I gather this is the maximum fine the bank could receive. Nonetheless, it will undoubtedly have an impact of earnings in 2024.

Looking beyond this however, I see plenty of positives. The bank’s hedging programme is set to bring in £5bn a year by 2025, while interest rates should fall closer to the so-called ‘sweetspot’ — around 2-3.5% — in the next 24 months.

I’m also intrigued by reports that the UK will be Europe’s fastest growing economy over the next 15 years. And clearly that’s good news for a UK-focused bank like Lloyds. In fact, the vast majority of its loans are mortgages and the bank is heavily tied to the UK’s fortunes.

All eyes on Lloyds earnings on 22 February.

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James Fox has positions in Lloyds Banking Group Plc. The Motley Fool UK has recommended Lloyds Banking Group 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.