Lloyds (LSE:LLOY) shares are a steal at 48p. That’s my opinion. The stock was rocked when Silicon Valley Bank (SVB) collapsed last month, but it fell less than peers. That downward pressure, which I don’t believe was warranted, has certainly made the stock more attractive, in my eyes.
So let’s take a deeper dive and look more closely at Lloyds.
A positive year
Over the past 12 months, Lloyds shares have pushed up despite the correction in March. The FTSE 100 bank is up 6.5%.
So if I’d invested £1,000 in Lloyds shares one year ago, today I’d have £1,065, plus dividends — around £45. That puts the total returns around 11%. That’s pretty good.
A secure investment
Lloyds has demonstrated some resilience over the past month. While Barclays, Standard Chartered and HSBC lost as much as 20% before recovering slightly, Lloyds fell just 10%.
These stocks fell on fear that banks were sitting on billions of unrealised bond losses after SVB had to sell bonds at a loss after depositor started withdrawing.
The thing is, SVB was unique in that its bond holdings were highly concentrated and it’s depositor base wasn’t diverse — it focused on tech which has been extraordinarily volatile in recent years.
Lloyds is a very different institution and is among the most secure big banks in Europe and North America. At the end of Q4, Lloyds had a liquidity coverage ratio (LCR) of 144%. This put it ahead of most major European and US banks — only four banks have LCRs above 150%.
However, it is true that Lloyds is very focused on the UK mortgage market — it accounts for more than half of revenues. And this means it’s potentially vulnerable to negative fluctuations in the housing market.
Tailwinds
Lloyds’ exposure to the housing market is often noted as a weakness, but in this current high-rate environment, the bank’s funding composition and its lack of an investment arm means it’s experiencing one sizeable tailwind.
In 2022, Lloyds said net income rose 14% to £18bn on the back of rising interest rates. Net interest margin — the difference between lending and savings rates — rose 40 basis points to 2.94% during the year.
Banks like Lloyds are also earning more from central bank deposits. At the end of 2022, analysts suggested that every 25 basis point hike could be worth £200m in extra revenue from its £145.9bn of eligible assets and £78.3bn held as central bank reserves as of June 2022.
The problem is that right now interest rates are a little too high. When Bank of England rates go above the optimal level — 2-3% — we see more debt turning bad and impairment charges rise. But the forecast is positive, with rates due to fall in line with the optimal level over the medium term.
This is actually one of the main reasons I’m buying more Lloyds stock after the share price fell in March. I think the medium-term forecast is very positive for this interest rate sensitive bank.
