Lloyds (LSE:LLOY) shares have been pushed downwards this year as the economic forecast worsened in the UK. The FTSE 100 stalwart currently trades for around 46p. That’s just a fraction of where it was over a decade ago, But today it’s a very different, and much smaller organisation.
Last week, it was published that Lloyds non-executive director Cathy Turner had acquired 424,113 ordinary shares in the firm. And while I can’t be sure of her exact reasoning, let’s take a closer look why Lloyds could be a good buy right now.
Tailwind 1:
The Bank of England (BoE) base rate has ensured near-zero interest rates over the past decade. And that’s not positive for lenders as it means net interest margins (NIMs) — the difference between savings and lending rates — have remained low.
However, the interest rate environment has changed considerably during 2022. The BoE base rate is now 3%. Some analysts see the base rate hitting 4% in 2023. But it could go higher.
And this means banks like Lloyds are now receiving more interest income because they imperfectly pass on lending income to customers with savings accounts.
Lloyds is actually one of the most interest rate sensitive banks in the UK. And this is not because it’s passes on less to its savings customers, but due to its funding composition and business model.
The group doesn’t have an investment arm and is highly reliant on interest income from mortgages. In the third quarter, interest income accounted for 74% of total income — £3.4bn. As such, we can see that the bank’s main revenue stream is booming.
Tailwind 2:
Ok, so this is still about interest rates, but it’s an interesting one. Lloyds, like other banks, earns interest on the money it leaves with the central bank. As of June 30, Lloyds had £145.9bn of eligible assets with £78.3bn held as central bank reserves.
Calculations suggest that every time the base rate is increased by 25 basis points, Lloyds could add close to £200m in treasury income solely from holdings with the BoE. It’s worth remembering that the base rate has increased by 275 points already this year. There could be another 100 still to come.
Risks?
Of course, like any investment, there are risks. Lloyds, like other banks, is often seen as a cyclical stock because it reflects the health of the economy. The UK economy has struggled in recent years, partially due to Covid, partially due to the Brexit vote, and also because of other long-term factors such as productivity issues.
And, right now, there are more concerns about the UK economy. In the last quarter, impairment charges soared to £668m from a release of £119m a year ago as bad debt concerns increased.
But, clearly for Turner, the tailwinds outweigh the risks right now. And I’d agree. I recently added more Lloyds shares to my portfolio.
