Lloyds (LSE:LLOY) shares haven’t pushed upwards in recent months despite its income surging. The blue-chip stock is down 0.77% over the past year and 3.1% over the past six months.
The giant British bank is often seen as a barometer for the health of the country’s economy. And with economic forecasts looking pretty bleak, its share price is down.
Some investors might see now as a good time to buy Lloyds shares. So, let’s take a closer look at why I’m one of them and am buying more stock in this UK bank.
Interest rates
I contend that banks are poised to enter a new era of record profit-making. And this is because interest rates are rising to levels not seen in a decade. For more than 10 years, we’ve had near-zero interest rates and that’s not been good for banks like Lloyds.
Currently net interest margins (NIMs) — the difference between savings and lending rates — are rising. In late July, the lender said that net income had surged 65% to £7.2bn for the six months to June 30.
But the thing is, interest rates are set to rise further. Some analysts have even suggested that Bank of England rates could hit 4% in early 2023. Naturally, that would make a huge difference to Lloyds’ income, but it would also likely result in new business falling.
Lower-risk
There are always risks when it comes to investments. But for me, Lloyds is among the lowest-risk banks in which to invest. The London-based firm is focused on UK mortgages and doesn’t have a big investment arm — the latter has been a drag on some banks. But UK housing is a fairly safe area of the market, in my opinion.
Last year, around 60% of the bank’s loans were UK mortgages. It’s not particularly diversified, and this is arguably why it has traded with a lower price-to-earnings (P/E) ratio than HSBC and other peers in recent years.
Lloyds is actually looking to increase its exposure to the property sector. Through Citra Living, it’s buying around 50,000 homes over the next 10 years. With the bank’s interest income rising and property prices cooling off, the current economic climate is arguably perfect for the Citra Living project.
Possible downside
As mentioned, banks — especially Lloyds — are often considered a barometer for the health of the economy. Thankfully, we’re not forecast to have a deep recession in the UK. A recession won’t be good for credit quality, but I think interest rate will provide benefits that outweigh the downside.
Strong fundamentals
Lloyds is currently trading with a P/E ratio of 5.8. That’s very low and less than half of the index average. The forward P/E is around 6.1, which is still exceptionally low but reflects money being put aside in case of inflation-linked defaults. I believe the forecast is very rosy for this FTSE 100 bank.
