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One of the positives for holding LloydsBanking Group (LSE: LLOY) shares is that interest rates have been rising.
And that’s relevant to Lloyds because it relies on the spread between interest rates for much of its earnings. Indeed, the spread is the difference between the interest it earns from loaning money and the interest it pays on customers’ deposits.
But making a profit from the interest rate spread tends to be easier when base rates are high. So the prior ultra-low interest rate environment made it tougher for banks like Lloyds to earn a decent crust.
Potential headwinds
However, higher interest rates alone don’t necessarily make Lloyds shares a potentially decent investment for 2023. One of the problems is that interest rates could soon stabilise or even move lower. Most commentators are now expecting the rate of inflation to drop during 2023. And if inflation cools, there will likely be little reason for central banks to raise base interest rates further.
And that could be one reason why the Lloyds share price didn’t make any positive progress through 2022. All stocks look ahead. So even though interest rates appear to be rising now, Lloyds shares could be moving to anticipate a less-favourable interest rate environment ahead.
But there’s another tricky potential headwind for Lloyds. And that’s the possibility of the UK facing a prolonged slow-down in economic activity. The bank’s business tends to flourish when its customers are doing well with money. So muted share price action now could be anticipating tougher times ahead.
Yet these things are hard to gauge. After all, Lloyds’ stock isn’t Lloyds’ business on the ground. And the shares will likely be looking ahead and trying to guess what will happen beyond immediate challenges in the economy.
Shareholder dividends ahead
Indeed, the cyclicality inherent in the banking sector makes it difficult to invest in Lloyds stock with any certainty of a positive outcome. And the firm’s patchy multi-year record for earnings, cash flow and shareholder dividends tells the story of past challenges in the business.
One of the outcomes of such unpredictability is the company’s perennial low-looking valuation. And I’m not expecting a re-rating anytime soon, or ever. So, for me, the many variables involved in any analysis of the business make the stock dangerous. And I know many investors have been frustrated by Lloyds over the past few years.
However, the swings in the fortunes of the business and the stock have provided some upside opportunities that might have been profitable for some. However, there have been plenty of balancing down-moves too. Nevertheless, City analysts are predicting double-digit percentage increases in the shareholder dividend ahead. And the yield is running well over 5%. Such factors are attractive to me.
Lloyds may gain operational and share price momentum from where it is now. However, on balance, I’m putting it on the ‘too difficult’ pile. And I wouldn’t choose it as a potentially enduring long-term investment for 2023 and beyond.
