Over the past few years, Lloyds Banking Group (LSE:LLOY) has dipped below 30p but has also rallied above 60p. At the moment, it trades roughly between both levels at 43p. However, I don’t think it’s a clear case of a rally from here as some might think. Here’s the risks (but potential opportunities), that I’m thinking about right now for Lloyds shares.
Reasons for a potential move lower
First up, let’s run through the two main risks for Lloyds shares, in my opinion, which could mean a fall lower towards 30p. One is that the Bank of England is now looking unlikely to increase interest rates much more this year. At the central bank meeting last week, the committee was cautious about the need to raise rates.
This is a change from what I and some in the market were expecting, given the high inflation in the UK. Indeed, Lloyds shares fell on Thursday following the meeting. The main reason behind this is that higher interest rates are good for the banks. It allows them to increase the net interest margin, boosting revenue. This margin is the difference between the rate charged on loans, versus the rate paid on deposits.
The second risk I see for Lloyds shares that could make them hit 30p is the increasing probability of a recession. This is mainly due to the cost of living crisis with high energy costs. It’s bad for the bank too, as people could default on loans, as well as leading to a drying up of spending. A level around 30p is quite an apt price, given that Lloyds shares traded at that level was during the pandemic economic slump in 2020.
Why I like Lloyds shares
The first reason I like the bank is that it should already see a benefit in coming quarters from the higher base rate. After the increase again last week, the base rate sits at 1%. Considering that it was cut during the pandemic to just 0.1%, it’s increased tenfold since then. In fact, in the latest Q1 results, the group increased its guidance outlook for the net interest margin.
Another positive slant for Lloyds shares is the strategy refresh that was announced earlier this year. It’s investing £4bn over the next five years to become more customer-focused. Part of this will go into digital developments, as well as making it easier to cross-sell different products and services.
I think this new-look Lloyds could help the share price reach 60p again. After all, the current trajectory is causing Lloyds shares to stagnate around the 45p mark. Over the past year, the shares have fallen by 6%, but without any huge volatility. The last time they were about 60p was before the pandemic hit, when the bank was in a very different place. Therefore, I think the strategy refresh could change it again for the better, to target these levels.
Overall, my bias is towards Lloyds shares hitting 60p before 30p, based on the benefit from the base rate being at 1%. But I could be wrong, of course as the shares have consistently defied expectations of a rise. Therefore, I’m keen to buy the shares soon, especially on a short-term market dip.
