Ignoring fees, stamp duty and dividends, if I had invested £1,000 in Lloyds Banking Group (LSE:LLOY) shares at the beginning of January, I would now have £1,000.
Yes, the Lloyds share price is unchanged this year, and is holding up during a period of rising energy prices and rampant inflation. Recently, it has also outperformed the FTSE 100, but why?
Results and dividends
In July, Lloyds reported a 12% increase in its net income during the first half of 2022.
A 20% increase in its interim dividend was also announced.
Lloyds’ last two dividends have totalled 2.13p. Based on its current share price, this gives a yield of 4.5% — a better return than that earned by leaving cash on deposit with the bank.
UK economy
But Lloyds is particularly exposed to the performance of the UK economy, with nearly all of its revenue being derived from domestic activities.
The Bank of England is forecasting that the UK will enter into recession during the fourth quarter of this year, and an impending economic downturn makes me nervous about the prospects for the Lloyds share price.
Bad loans
One key metric for banks is the level of provision they make for loans that they estimate might not be repaid.
Although Lloyds’ provision for bad loans is less than it was during the pandemic, it was increased by £377m when its half-year results were published two months ago.
Lloyds is the UK’s largest mortgage lender. A downturn in the housing market is likely to lead to a reduction in new business, and a squeeze on disposable incomes will further increase the likelihood of bad loans.
Interest rates
But I like the idea of investing in banking shares. With interest rates rising both in the UK and overseas, the net interest margin earned by banks — the difference between the amount earned from lending money and the amount paid on deposits — will increase.
Other options
So, what about other high-street banks in the FTSE 100?
Barclays has seen no change in its share price during 2022, and its dividend yield of 3.7% is the lowest of any bank in the Footsie.
In contrast, the share price of NatWest has risen by approximately 12% this year. Encouragingly, research by Numis has found that NatWest is likely to benefit the most from rising interest rates.
Yet, over 90% of NatWest’s outstanding loans are to UK customers.
HSBC is the largest bank in the FTSE 100 and its shares have risen by 19% this year.
Nearly 80% of HSBC’s income is derived from outside the UK, which removes some of my fears about being exposed to a faltering UK economy.
However, HSBC is heavily invested in China’s property market, with a third of its lending to the sector either substandard or impaired. Morgan Stanley has warned that a further downturn in China could impact on the wider economy in Asia, from where HSBC generates nearly two-thirds of its profit.
What should I do?
As the global economy shows signs of weakening, it looks as though the four largest banks in the FTSE 100 are going to face a difficult period ahead.
I am therefore going to wait before investing further in Lloyds, or any of the other FTSE 100 banking stocks.
