A lot of FTSE 100 stocks have started recovering from the Covid-19 stock market crash. Sadly, that doesn’t include Lloyds Banking Group (LSE: LLOY). Lloyds bank shares are still hovering around the 30p level, 50% down since the start of the year. By comparison, the FTSE 100 itself has pulled back to just a 19% drop over the same timescale.
The Lloyds share price has actually picked up a little since its lowest point in the crash. It’s up 18%, which would be a nice gain in more normal times. But that’s not much comfort for long-suffering Lloyds shareholders (like me). And we don’t even have our dividends to tide us over, now the banks have all suspended them.
We can’t blame the pandemic lockdown for all of the woes, though. Lloyds Bank shares were already under pressure from a slowing housing market and the resulting weakness in retail banking demand. And then we had Brexit too, that ogre that the country seems to have conveniently forgotten at the moment. With EU negotiations on the back burner while we fight the virus, no progress has been made, and the sides seem as far apart as ever.
Lloyds Bank shares
That doesn’t bode well for banking stocks in general, or for Lloyds Bank shares specifically. But, though out economic outlook has genuinely been getting gloomier, I remain convinced that markets have overreacted. I really do see Lloyds shares as oversold and undervalued. In the medium term, I expect a recovery at least to 50p levels, and a resumption of the dividend. I’ll be happy with that.
The Virgin Money (LSE: VMUK) share price is also down around the same 50% as Lloyds Bank shares since the start of the year. But it did initially drop lower than Lloyds, so the comeback looks more impressive in percentage terms. At one point, the price was down a scary 75%, and Virgin Money shares have doubled in value since then.
Challenger banks are potentially open to greater risk than the much larger established banks. They just don’t have the same cash reserves as the big players. But they don’t have the same risk of legacy bad debt either, so that’s an upside. Still, I’d always expect Virgin Money shares to be more volatile than Lloyds Bank shares in tough economic times. And the smaller weight of the challenger banks, with the agility that can be a boon in bullish times, can quickly turn to look more like a liability.
Two strong buys
But when I examined Virgin Money a month ago, I though its liquidity was easily enough to get it through the crisis. With little chance of the bank going bust, in my view, I thought the shares were cheap. The price has only edged up around 4% since then, and I still rate Virgin Money a buy.
But that’s not in preference to Lloyds. I’d buy more Lloyds Bank shares too.
Alan Oscroft owns shares of Lloyds Banking Group. The Motley Fool UK has recommended Lloyds Banking Group. 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.