Lloyds Banking Group (LSE:LLOY) is a UK-based banking firm and a constituent of the FTSE 100 index. With interest rates on the rise, I want to know if now is the time to buy Lloyds shares. They are currently trading at around 44p, down 6.8% in the past year. Let’s take a closer look.
Should I buy?
Prior to the pandemic, the share price was trading slightly above the 60p level. However, inflation, the war in Ukraine, and the pandemic itself have all resulted in a drop of about 25% in over two years.
For 2020, the business reported pre-tax profits of £1.2bn, down from £4.4bn in 2019. By 2021, however, pre-tax profit had grown to £6.9bn.
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Needless to say, the firm is in a much better financial position than it was during the middle of the pandemic.
Now, I think there could be signs that Lloyds is recovering. Interest rates, a tool used among other things to control inflation, have been on the rise since the beginning of 2022.
Interest rates are of critical importance to banking firms because they largely dictate how much banks can charge customers for borrowing money.
Outside banking, however, rising interest rates may be bad news for the stock market. This is primarily because higher interest rates make savings accounts more attractive.
Central banks in the UK, US, and eurozone have given strong indications that they will continue with interest rate hikes in a bid to stabilise economies. This could be good news for Lloyds.
Should I stand aside?
There are risks involved with buying Lloyds shares, however. Firstly, there could be a general downturn in the stock market. This could drag many share prices downward.
Any serious resurgence of the pandemic, or other negative events like the war in Ukraine, could also have a severe impact on companies. This could lower the value of any future holding I might have.
Secondly, there are some initial signs that the housing market is beginning to slow down. The average time for houses to stay on the market is lengthening and prices are beginning to slide slightly.
This could be bad news for Lloyds, because this may mean that fewer people are seeking mortgages.
Furthermore, people are starting to feel the pinch of inflationary pressures and rising energy costs. Tighter spending could result in falling demand for loans, and this could dent a major part of the bank’s operations.
Overall, the firm has clearly recovered strongly from the pandemic. Rising interest rates could make this an attractive investment, but there are also a number of risks associated with the business. For me, these risks outweigh any potential rewards at this time, and I will not be buying shares until the broader economic environment has stabilised.
