Lloyds (LSE:LLOY) shares were down nearly 5% over the past week. The fall was engendered by unexpectedly high US inflation data, as well as negative economic forecasts in the UK and Germany.
The US inflation data raised expectations that the Fed would raise interest rates by 75 basis points on Wednesday. While this spooked the market, investors — among others — are now hoping to see central banks take a hawkish approach to tackle inflation.
However, more generally, investors in Lloyds haven’t had a good year. The stock has bounced up and down but is down 11% since the start of January.
So, at 43p, here’s why I’d buy more Lloyds stock.
Recent performance
Lloyds has performed well recently. In Q1, the bank reported pre-tax profits of £1.6bn, beating the average forecast of £1.4bn. But this also represented a fall from 2021, when the lender registered £1.9bn in profits for the first quarter.
The year-on-year decrease is largely due to £177m set aside to protect the bank from potential defaults linked to the current inflationary pressures.
2021 was a good year for the bank. Underlying net interest income rose 4% to £11.1bn. Net income rose 9% to £15.8bn. However, pre-tax profit came in just below expectations at £6.9bn.
Prospects
The Bank of England has raised rates from 0.1% to 1% this year. And tomorrow we might see a 50-point basis hike.
Higher interest rates mean banks like Lloyds earn more money on the cash they lend commercially, and their deposits in the central bank. This means higher margins for the bank.
However, higher rates may have a negative impact on borrowing volumes. 71% of Lloyds’ loans are mortgages, and higher rates may cause potential home buyers to postpone their purchase. This wouldn’t be good for the bank.
So it could go either way. But it’s worth noting that historically low interest rates over the past 10 years are partially responsible for Lloyds’ depressed share price.
I’m also interested in Lloyds’ decision to become a property owner and enter the rental market. Lloyds is aiming to be one of the country’s largest landlords, purchasing 50,000 homes in the next 10 years. The margins could be very good here.
Concerns
Lloyds is less diversified than its peers. And a downturn in the property market could hurt this lender more than others. This downturn could be take place pretty soon if higher rates put off potential home buyers.
However, while there might be short-term pain, I’m bullish on long-term demand for property in the UK.
Valuation
Lloyds’ lack of diversification is likely to be one reason as to why it trades a lower multiples than its peers. It has a price-to-earnings (P/E) ratio of just 5.8. Meanwhile, HSBC has a P/E of 10, and Standard Chartered has a P/E of 9.45.
