Shares in Lloyds Bank (LSE: LLOY) have taken a hit. Back in mid-January, Lloyds’ share price was hovering around the 55p mark. Today, however, it’s near 45p.
It seems this share price is now attracting investors. Last week, Lloyds was the second most bought stock on Hargreaves Lansdown. Should I follow the crowd and buy Lloyds shares for my own portfolio? Let’s discuss.
Three reasons to buy Lloyds shares today
I can certainly see some appeal in Lloyds shares right now. For starters, the company is benefiting from higher interest rates.
Higher rates benefit traditional banks due to the fact that these earn a large chunk of their income from the spread between borrowing and lending rates. When rates are higher, they’re able to earn a larger spread.
This is illustrated in Lloyds’ recent half-year results. For the six months to 30 June, the company generated underlying net interest income of £6,135m versus £5,418m a year earlier.
I expect the Bank of England (BoE) to keep hiking rates in the near term in an effort to bring inflation down. If I’m right, Lloyds’ profits could get a further boost.
Secondly, Lloyds is raising its dividend. In the recent results, the bank declared an interim dividend of 0.80p per share, up around 20% year-on-year. For the full year, City analysts currently expect Lloyds to pay out dividends of 2.49p per share. At the current share price, that equates to a dividend yield of 5.5%.
Additionally, the stock’s valuation is low. With analysts expecting the bank to generate earnings per share of 7.03p for 2022, the forward-looking P/E ratio is just 6.5. So there could be some value on offer here.
And one major reason to give the stock a miss
I do have one major concern in relation to Lloyds shares and that’s economic conditions here in the UK. Right now, a lot of Britons are struggling due to soaring energy and food costs. As a result, the UK is expected to experience a recession in the near future.
Indeed, last week, the BoE warned that the UK economy is set to enter its longest recession since the global financial crisis of 2008. It believes the UK economy will shrink the final three months of this year and continue shrinking until the end of 2023.
Now this could have major implications for Lloyds, due to the fact that its fortunes are tied to the health of the UK economy. A major recession could lead to a high level of loan defaults which could lead to a lower level of profitability. This, in turn, could potentially lead to share price weakness and dividend cuts.
Lloyds shares: my move now
Given this risk I’m happy to leave Lloyds shares on my watchlist for now. To my mind, there are better, safer stocks to buy for my portfolio in the current environment.
