With the Lloyds Banking Group PLC (LON:LLOY) (LLOY.L) share price continuing to trade below 60p, it remains in the red for 2018 so far. In the near term, I wouldn’t be surprised if there is more volatility ahead for the bank’s valuation, with Brexit coming up and the prospects for the UK economy being relatively uncertain.
Since the bank generates almost all of its income in the UK, it could be more heavily impacted by the outcome of Brexit than many of its FTSE 100 sector peers. If there is a deal between the UK and the EU, for instance, it may have a positive impact on sentiment towards UK-focused shares, and this may catalyse the company’s stock price in future months.
A deal, though, may or may not occur. I’m optimistic about the long-term prospects for the Lloyds share price due in part to its revised strategy. The company is focusing on efficiency, and is attempting to further lower its cost to income ratio.
Investment in areas such as digital operations could help it to cut costs, while also appeal to changing consumer tastes. And with it set to invest up to £3 billion in the digital arena, I’m upbeat about its ability to post improving financial performance in future years.
As well as its investment in digital opportunities, I’m also upbeat about the prospects for Lloyds as a result of its valuation. It has a price to tangible book value of around 1.1, which suggests to me that it may offer a margin of safety. And with a P/E ratio which is in the single digits, I feel that the stock could be undervalued given the risks it faces.
Therefore, while its share price may continue to disappoint in the short run, a low valuation, changing strategy and the potential for a growing UK economy make me optimistic about its long-term prospects.