It has been a disappointing time to be a shareholder of banking giant Lloyds (LSE: LLOY). Last November the shares started the month trading just above 50p apiece. Since then, the Lloyds share price has fallen 20%.
But there are signs of positive news for the banking industry as interest rates rise. So, should I start buying Lloyds shares again now for my portfolio while I can still bag them at the current price?
Some good news for banks
Higher interest rates can be bad for borrowers because they need to pay more when servicing their loans. But that can be good for banks as they stand on the other side of the transaction. As the UK’s largest mortgage lender, I think this could be a key benefit for Lloyds from interest rate hikes. That might help support an increased share price.
Indeed, in the bank’s third-quarter trading statement released last week, there was already evidence of this happening. Underlying net interest income for the first nine months came in at £9.5bn, a 15% increase over the same period last year. I expect interest income may remain elevated for the foreseeable future due to higher rates.
Bad news too
But already we also see some evidence of how higher interest rates, along with a worsening economy in general, could be bad for the bank’s financial performance.
Statutory profit before tax for the quarter fell 26%. It still came in at £4bn, which is a lot. Lloyds has a market capitalisation of £28bn, so its shares continue to trade on a low price-to-earnings ratio. That could make its current valuation look attractive. But the fall is a large one. Moreover I think we are only seeing the start of how higher interest rates might impact profits. Next year could be worse.
The financial services powerhouse also changed its outlook for the year, specifically citing interest rate changes as a risk when it referred to “the balance of risks shifting from Covid-19 to increased inflationary pressures and rising interest rates”.
That led to a gloomier outlook than Lloyds had before. For example, it increased its expected credit loss in the first nine months of 2022 from £4.5bn at the start of the year to £5bn now. Big interest rate rises have only kicked in fairly recently for many borrowers, so I think such news could get worse over the winter and into 2023.
I’m not tempted by the Lloyds share price
That is why, despite the Lloyds share price falling and a dividend yield now exceeding 5%, I will not be adding it to my investments any time soon.
I think it has real strengths, from its large customer base to a strong assortment of banking brands. If investors focus on those and the economy suddenly shows signs of recovery, the Lloyds share price could start to turn around.
I would be surprised to see that in November though. The UK economy is struggling and rising interest rates could mean higher default rates eating further into Lloyds’ profits.
That could be bad for the Lloyds share price in November and beyond. For now I see better opportunities for my portfolio elsewhere in the UK stock market.
