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Is Lloyds share price now too cheap to ignore?

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Lloyds banking group (LSE: LLOY) released Q1 numbers on Wednesday, and they looked generally positive. But Lloyds’ share price was little changed, up 2.5% by mid-morning.

Managing Director Charlie Nunn said: “In February, we announced our ambitious new strategy, aimed at transforming our business, generating a stronger growth trajectory and enabling the group to deliver higher and more sustainable returns and capital generation.

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The bank expanded on this in March, announcing a new business structure. This all sounds good, but it brings with it significant uncertainty.

We have a bank that is restructuring at a time of severe economic pressures and runaway inflation. I expect continued weakness in Lloyds share price as a result.

Profit and impairments

The quarter saw a fall in profit after tax from £1.4 billion to £1.2 billion. But that’s largely due to a change in the bank’s depreciating status.

A year ago, the first quarter brought a net writedown as cash set aside to deal with the pandemic began to ebb. This time we saw a net charge of £177m, resulting from the deteriorating economic outlook. But the bank describes the impact as limited, and “offset by rising house prices and unemployment.”

This, however, illustrates an uncertainty that banks face for the remainder of 2022 and likely into 2023. HSBC Holdings also reported credit impairment charges for its first quarter, and I expect others to follow suit.

Before impairment charges, Lloyds’ underlying profit actually rose 26% from the same quarter a year ago. And that’s up 78% from the last quarter of 2021.

It’s all about the dividend

For me, investing in Lloyds is about dividends. This reassured me during the years when I saw the Lloyds share price go almost nowhere. For the dividend to improve over the coming year, I look at a few key metrics.

One is earnings, and we saw first-quarter EPS drop 17%. Again, this is partly due to new impairment charges. But I see a strong possibility of further writedowns over the next few quarters, so at the moment I’m not overly optimistic about earnings growth over the full year.

Nevertheless, the bank’s asset and liquidity situation looks more encouraging. Lloyds has raised its full-year guidance and now expects a return on tangible equity of over 11% in 2022.

Lloyds also announced a liquidity coverage ratio of 138%, down from 134% a year ago. In my view, I envision a solid foundation for long-term cash generation and progressive dividends. But in the short to medium term, I see Lloyds facing another external economic attack.

Lloyds future share price

I think the keys to how 2022 plays out for the Lloyds share price will be inflation and interest rates, and how soon retail price increases will start to slow. The property market is also likely to be vital, with Lloyds heavily involved in the build-to-let business and mortgages in the UK.

I remain optimistic about these two long-term factors. So despite the current risks, Lloyds remains a hold for me.