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It has been a rare pleasure to see the Lloyds Banking Group (LSE:LLOY) share price up 40% over the past 12 months.
But is that all there is left for 2024? And has the value we have been waiting for for years finally been revealed? I think the answer is no on both counts. And I am not selling.
However, the banking sector is not yet out of the woods. There are still dangers ahead.
Financial risk
I think there is one thing that could help Lloyds' share price recovery to last until the end of the year: impairment charges, cash set aside to help cover the risk of bad debts and the like.
To be more specific, it is falling. In the first half results, published in July, we saw an underlying impairment charge of £101 million.
Compared to a statutory profit after tax of £2.4bn, that doesn't sound like much. And more importantly, it's down from £662m in the same period last year.
This is despite the Bank of England having only cut interest rates slightly once so far, but it does indicate a lot of confidence that the burden on mortgage borrowers will be eased in the future.
Two sides
However, there is another side to that coin: Lloyds makes a good deal of its money as the UK's largest mortgage lender.
So falling rates might reduce the risk of defaults, but it also reduces the potential for net earnings on loans. At the interim stage, we had a 13% drop in net interest income, and that is worrying.
The extent of this move could have an effect on Lloyds' position at the end of the year, and it may not be a positive one.
Lloyds' historic motor insurance business is under investigation, which impacted the first half. But there were no new charges in the first half. We should have an update from the FCA in September, and that could cause some concern for Lloyds' share price.
Rating, rating
Still, for me, if I look at Lloyds through the long-term glasses I have worn throughout my investing career, it all comes down to one thing: valuation.
We should always treat analyst forecasts with caution, but I believe that a projected price-earnings (P/E) ratio below 10 for this year, falling to 7 by 2026, leaves a lot of room for error.
It has been lower in recent years, but that makes me wonder why the market couldn't see it then as the anomaly it was convinced it was.
And seven is still only about half. FTSE 100 IndexThe company's long-term average P/E. I'll happily admit that the risk still faced by the country's banks means they should probably be valued below average right now.
The next few months
But for long-term investors, shouldn't we be thinking about how Lloyds' earnings are likely to evolve over the next 10 years or more, rather than the next few months?
On that basis, and depending on how I expect the market to deal with the short-term issues, I think the Lloyds share price could go to any level by the end of the year, but I think it deserves to go higher and could go higher still.
Oh, and I haven't even mentioned the forward dividend yield of 5%.
