Lloyds (LSE:LLOY) has been a staple of the UK banking scene for many years. It has been able to thrive in domestic retail and commercial banking and has resisted the flashier investment-banking sector. The bank, however, has had a relatively underwhelming year with the share price remaining flat. Will the current outlook and recent financial results encourage the Lloyds share price to soar?
Positive results?
Lloyds latest results saw pre-tax profits fall to £1.6bn from £1.9bn a year before but comfortably beat analysts’ expectations of £1.4bn. The lender has benefited from rising Bank of England base rates over the last year. This has boosted the net interest margin — the difference between the cost of funding and the price charged for its lending. With further base rate rises expected in the next year, this is only likely to further increase Lloyds’ margins.
However, as inflation has raised the cost of living in the UK, Lloyds has been forced to add £177m to its reserves to protect against bad loans. As a result, it’s likely to see a hit to its bottom line if the current trend of rising prices continues.
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A strong outlook or future risks?
The bank accounts for approximately 19% of the domestic UK mortgage market through its various brands. Because of this domination in mortgages, Lloyds’ success is heavily tied to the strength of the housing market.
The UK government has given banks more power to offer mortgages to those who would not normally be able to get one. The mortgage guarantee scheme was introduced in 2021 and it has allowed banks to offer riskier mortgages that are backed by the government if they were to default. This has increased the number of mortgages Lloyds can sell and it will likely improve profitability.
However, there are risks with this high exposure in the mortgage industry. Rising interest rates will likely increase the number of mortgages that consumers are defaulting on. This means Lloyds will have to syphon more cash into reserves to allow for an increase in mortgage defaults, as well as for the more general loan defaults I mentioned earlier.
A notable FTSE 100 dividend
The bank has a positive outlook and, with a price-to-earnings ratio of 6.1, the Lloyds share price seems good value for money. However, I feel the share price is unlikely to dramatically soar in the coming year due to the uncertainty ahead in the economy and banking industry.
This said, the lender’s 4.3% dividend is enough to tempt me to add the FTSE 100 share to my portfolio. Even if the share price remained at the current level, a 4.3% dividend would sweeten the investment. The company has the financing to maintain the dividend with only 26% of profit being paid out to investors.
Overall, I believe that the Lloyds share price is unlikely to soar dramatically in value in the coming months. This said, the strong dividend and positive outlook is enough to tempt me to add the FTSE 100 share to my portfolio with my next chunk of savings.
