The Lloyds Bank Group (LSE:LLOY) share price remains stagnant. Despite posting billions in profits and share buybacks, the bank stock continues to hover in the same place, leaving many investors disappointed.
Providing the group continues to deliver impressive earnings, patient investors may still be rewarded through its chunky 6% dividend yield. But chances are that as the economic conditions improve and investor confidence returns to the market, the stock will naturally start to trend up.
After all, throughout the group’s history, its market capitalisation has been strongly tied to the performance of the British economy. That’s hardly surprising, given Lloyds is one of the biggest banks in the UK. And I doubt this trend is going to change anytime soon.
But the economy is a big place with countless factors driving its performance. And not all of these are likely to influence the Lloyds share price. So what should investors be paying attention to?
Lloyds is Britain’s landlord
Like many commercial banks, Lloyds makes its money by accepting deposits and lending them to individuals and businesses. Its profit margin is based on the spread between the interest rate on its issued loans and the interest paid to depositors’ accounts.
As of June, the bank had £450.72bn worth of issued loans generating interest. But a closer look at the loan book reveals that £307.8bn of this, or 68%, is in the form of mortgages. That’s roughly 20% of the entire UK’s property market. And, subsequently, its performance is inherently tied to that of the real estate sector.
It’s no secret that real estate hasn’t been a stellar performer in 2023. Most REIT investors have experienced first-hand the impact of rising interest rates on property values. And this market downturn could create problems in the short-to-medium terms for this bank.
Why? Because higher interest rates reduce demand, even with lower property prices. It also puts more pressure on households who took out a cheap mortgage a few years ago and now can’t afford to pay the higher rates. And Lloyds has already seen the number of defaults start to rise.
Real estate in 2023, 2024, and beyond
Analysts from the real estate group Savills have been keeping close tabs on what the UK property sector is likely to do in the coming years. And based on the latest forecasts, 2023 has been, and will continue to be, rough.
By the end of the year, the overall UK real estate sector capital value is expected to shrink by 10%. And for areas like London, the downturn is likely to be more severe around 12.5%. However, excluding London, the forecast for 2024 looks far less scary as house prices begin to stabilise. But even then, growth isn’t expected to exceed 5% again until 2026.
Forecasts always need to be taken with a pinch of salt. Don’t forget they rely on a lot of expectations that rarely come to pass. But let’s assume Savills’ predictions are accurate. In that case, the UK property sector may be nearing the bottom of its downcycle in the next 12 months.
Linking back to Lloyds, if the firm is set to ride the tailwinds of a recovering housing market, then its share price could be in for some far brighter years ahead.
