Down 89%, are Lloyds shares finally a buy in February 2023?

Share prices of UK-focused banks Lloyds Banking Group (LSE: LLOY) now only 11% of the former value. In other words, it appears to drop a staggering 89% over the year. Anyone with £10,000 of shares invested in Lloyds shares now only owns £1,100 of shares.

A useful lesson in the importance of diversification into various stocks aside, this dramatic drop presents an opportunity, I feel. £10,000 of shares invested today will return a value of £90,900 if the share price returns to its previous price. Can I do this? Let’s find out.

What happened to the stock price?

Stock prices reached their peak in the late 1990s. The 2000s was a difficult decade for companies culminating in the Great Financial Crisis.

Lloyds went through painful times which led to a government bailout, and one of the results was that the number of shares increased from 6 billion to 71 billion. This explains, in large part, why stock prices have fallen so much.

And this dilution of stocks is exactly why it is unlikely that we will return to the highs for a long time, especially in a saturated market like banking. But I still see reasons to be bullish in the short term.

The finances are impressive

While full 2022 results are expected next month, the nine months to September show an increase in annual net income from £11.6bn to £13bn. And the company trades at a low price-to-earnings ratio of just over 9.

The 4.2% dividend yield in 2021 is expected to increase slightly when the final 2022 results arrive.

Higher interest rates are a strong tailwind for companies. The Bank of England has announced that rates will reach 3.5% next month, and further increases to curb inflation are also out of the question. Higher rates are an advantage for banks that can offer savings accounts of 0.5-2.5% and other pockets.

So all this makes Lloyds buy for me now?

Big problem

The biggest problem with Lloyds is the long-term outlook. I find it hard to see any bank as a reliable investment these days. The 2008 recession – partly caused by certain banking practices – left a sour taste in my mouth.

The emergence of nimble fintechs, such as Starling and Monzo, that offer retail services could be a problem for these banks.

With the broader stock market correction of the past year, I see many long-term options that appear to be undervalued elsewhere. So I won’t be opening a position at Lloyds any time soon.