UK financial shares, including Lloyds Banking Group (LSE: LLOY), took a tumble after the tragic war in Ukraine began. As increasing international sanctions against Russia escalated, the Lloyds share price carried on down. But it has already started bouncing back.
Between 23 February and 7 March, Lloyds shares fell from 52.2p to 41.25p. That’s a 21% loss in just eight market days. But we’re now looking at a sharp rebound to 48p, at the time of writing. So what’s happening and where will Lloyds shares go next?
The Bank of England’s (BoE) interest rate rise will have had a positive effect. It is the third hike in four months, this time taking the rate from 0.5% to 0.75%. It comes as the BoE warns inflation could reach 8% or beyond later in the year, having already hit 5.5% in January. The latest pressure comes from the war’s fallout, which has pushed oil beyond $100 per barrel.
Profitable lending
Rising interest rates are not good for borrowers, but they are good for lenders. And I really think the UK’s super-low interest rate has been the biggest thing holding back the Lloyds share price. Lloyds is a UK-focused bank these days, and the UK’s biggest mortgage lender.
That means every small increase in base rates will help push up the margins Lloyds can earn from its lending.
I think it’s very likely we’ll see further interest rate rises over the rest of 2022. And that should be good for Lloyds, and other bank shareholders.
Interest rates
My main regret is that this didn’t happen in better times. Had there been no war, no oil price hike, and no supply chain damage, I think the Lloyds share price would have remained above the 50p level that it just can’t seem to hold. An interest rate rise could then have helped push them further, even if it might not have come just yet.
There is a downside to rising interest rates. They could put the squeeze on borrowers who have taken advantage of very low rates and taken on big debt. So could we see rising debt defaults if rates rise further and faster than expected?
I’m really quite buoyed by Lloyds bad debt performance during the Covid-19 pandemic. The bank stashed away considerable sums to cover possible defaults. But things turned out nowhere near as badly as feared, and Lloyds has been returning some of those reserves to its balance sheet.
Lloyds share price resilience
While the Lloyds share price does seem to be resistant to upwards movements, I do think I’m seeing a limit to the downside these days. Even when there’s a shock that sends it down, the market seems to rally and push it back up again. I can’t help thinking there are a lot of investors out there buying on the dips.
At the current price, we’re looking at a trailing P/E of around 6.5, which is less than half the FTSE 100‘s long-term average.
Are there risks? Yes, we could be in for a prolonged economic squeeze with continued rising inflation. And that would fuel the uncertainty surrounding the financial sector. My feeling is that the market will remain cautious over Lloyds this year. But I’m still holding for the long term.
