The share price of Lloyds Banking Group PLC (LON:LLOY) (LLOY.L) has traded as high as 89p in the last five years. Today, it is priced at around 52p. That’s a fall of around 42% in a relatively short space of time.
While I can understand why investors have become increasingly uncertain about the prospects for the bank ahead of Brexit, I also feel that it could offer a brighter long-term future than is being priced in by the market.
Sure, Brexit could cause disruption in the near term. However, I feel that much of the risk involved in leaving the EU may now be priced into UK-focused stocks. This does not mean that further volatility will be avoided, but rather that there could be long-term recovery potential on offer in my opinion.
Lloyds, for instance, appears to have a strong position within an industry that is undergoing rapid change. Consumers are becoming increasingly focused on digital banking, rather than going to branches. With the company set to invest up to £3 billion in its digital banking capabilities, it may be able to enjoy a dominant position in this area.
While challenger banks have grabbed market share in recent years, they may find it more difficult to adapt to industry changes as a result of a relative lack of size and scale.
Lloyds also appears to have an improving balance sheet according to my research. The company has rationalised its asset base in recent years, while its performance in stress tests has been relatively encouraging in my opinion.
Therefore, while there could be further ups-and-downs ahead for the business in the short run as Brexit moves ahead, I’m optimistic about its turnaround potential in the long run. A P/E ratio of around 7 suggests to me that it may be undervalued at the moment.