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Are Lloyds shares good value as interest rates rise for the UKs biggest lender?

By David Burrows

09:05, 12 July 2022

Lloyds Bank branch in London. Photo: Shutterstock
Lloyds shares at 42p are low historically but does that mean they are good value now? Photo:Shutterstock

All eyes will be on Lloyds Banking Group (LLOY) which reports half year results in just over a fortnight - on 27 July.

We should then get a taste of what impact the higher interest rate environment is having on revenues - for the UK’s largest lender, it should be positive.

Of the big UK banks Lloyds and Natwest carry the highest dividend yields at around 4.8% each.

In addition to this, after losses of around 12%  year to date, its shares at 42p ought to be looking pretty cheap.

Lloyds Bank (LLOY) share price chart

Historically, this is low for Lloyds shares. Pre-pandemic in February 2020, the stock price was around the 63p level but actually dropped as low as 23. 98p in late September 2020. Lloyds shares have not gone below that figure since but have not got close to pre-pandemic levels either.

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Rate rise boost

There are arguably some reasons to be positive on Lloyds.  Rising interest rates are a boost for banks in general.

In addition, Lloyds is the biggest UK mortgage lender and house prices and sales don’t appear to be showing much sign of slowing, given the most recent Rightmove data which reported a ‘spring market frenzy’. Whether this continues through the summer is yet to be seen.  

Mortgage demand looks supportive right now but that could change as rising living costs bite even harder. There is also a chance that further down the line, we might see a marked cooling in the housing market and an increase in bad debts. 

Business loans might strengthen too – with inflation leading to higher rates of borrowing to SMEs. But given the threat of recession will SME’s be more inclined to hold fire on any borrowing?

Lloyds shares a value trap?

Given these worst-case scenarios, there is an argument that Lloyds is a ‘value trap’ right now. A sound business with a decent long-term outlook but nevertheless, a share price that is going nowhere fast. But arguably it could see a decent bounce or as a long-term play investors may look to increase their exposure at the current price.

Danni Hewson, financial analyst at AJ Bell can see why investors would be interested in Lloyds right now but also identifies the risk too.

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“Some investors have cottoned onto the fact that rate hikes will mean bigger profits for banks but there is still concern about how the cost-of-living crisis could impact bad debt and curtail the booming mortgage market and there are questions about how much demand there will be for cash generating loans as consumers worry about recession risks”.

“But think about all those fixed rates drawing ever closer to re-mortgaging deadlines and you’ve got a recipe that looks pretty unappreciated by markets at the moment.”

Hewson believes the bank has worked hard over the last few years to cut costs and pad margins and despite the obvious price pressures from wage increases it is well placed to capitalise on the changing economic backdrop.

Add in its attractive dividends, much sought out by income investors and it’s a stock that is likely to draw more attention over the coming months.

“There’s a lot to like but the sector as a whole still has a bucket load of red flags and with cash cycling out of stock markets and into perceived safer havens that volatility might keep some watching until the dust settles.”

Jason Hollands, Managing Director at Bestinvest tends to support the bears rather than the bulls when it comes to Lloyds.

“We’re neutral on Lloyds, as it has a greater domestic focus than the other major UK banks – and so is more exposed to a potential recession. In particular, it has a greater dependency on the mortgage market and SME lending, where bad loans are likely to rise as the economy stalls”.

Better value banking stocks?

At the moment, Holland prefers Barclays (BARC) and Standard Chartered (STAN).

“Barclays’ investment banking operation seems under appreciated by the market; while Standard Chartered’s strong emerging market footprint should benefit from the easing of COVID restrictions in China and loosening of Chinese monetary policy at a time when the developed world is tightening.

Markets in this article

LLOY
Lloyds Banking Group PLC
0.5226 USD
STAN
Standard Chartered - GBP
6.807 USD
BARC
Barclays
1.8400 USD

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