Investors have been bearish on Lloyds (LSE:LLOY) shares for a few months now. Ever since hitting post-pandemic highs of 55p in January 2022, Lloyds shares have fallen over 20%. They are currently trading at 43p. But all this could change in the coming months. Sings of economic recovery are getting stronger. And with the bank of England (BoE) set to meet in August, I think this could be the perfect time for me to capitalise on the cut-price Lloyds share price before it returns to pre-pandemic highs. 

BoE’s woes

In order to curb inflation in the UK, the Bank of England has steadily increased interest rates this year. After the last hike, interest rates stand at 1.25%, up from 0.1% in December 2021. 

The committee that decides interest rates is set to meet again on 4 August and BoE Governor Andrew Bailey has warned that another 50-point hike is on the table. This would take the interest rate to 1.75%. And given that most estimates suggest an 11% inflation rate by the end of the year, I think the BoE will go through with the 50-point hike. 

The base interest rate hikes throughout this year have already caused a 10% jump in net interest income for Lloyds in the first quarter (Q1) of 2022. And with the banker set to release half-yearly results on 27 July, I expect a similar bump in earnings. But can the extra cash from interest payments alone boost the Lloyds share price?

The Lloyds share price offers value

There is a simple equation to factor in here. Higher base interest rates equal higher earnings for Lloyds bank. And the gap between the interest paid by Lloyds on cash held in accounts (which is expected to remain stable) and the interest received from loans will grow wider.

Also, this is a positive sign for Lloyds shares’ yield of 4.57%. Given the strong cash generation, the board expects to increase yield progressively starting from 2021’s dividend of 2p per share. The Lloyds dividend also comes with an earnings cover of 3.9 times. 

Given these factors, I think the Lloyds share price offers decent value at its current levels. But there are factors that could trigger a further collapse as well. 

When the economy suffers, consumer buying power decreases. And the latest retail sales data backs this up. Fuel, clothing, and housing goods sales all fell by over 3.5% in June 2022. And online sales figures are falling rapidly after seeing a huge surge during the pandemic. Online sales fell by 3.7% last month and accounted for just 25.3% of total retail sales in June, compared to 37.4% in February 2021.

Another factor to consider is how much the average investor would be willing to invest in a recession. Daily trading volume has fallen 23% since March 2022. This is a strong sign that investor activity will drop rapidly if the UK government announces a recession.

However, the Lloyds share price looks more attractive to me compared to other top UK bankers. It’s cheap right now, has a robust yield, and could continue to generate higher revenue for the foreseeable future. I am waiting for the results later this week and would add Lloyds shares to my portfolio if the market reaction is favourable. 

The post Could the Lloyds share price finally be back on its way up?  appeared first on The Twelfth Magpie.

More reading

• Is there any value left in Lloyds shares now they’re over £1?
• Prediction: this UK growth stock will outperform Lloyds shares over the next 5 years
• Barclays, NatWest or Lloyds shares: which is the better pick for a UK retirement portfolio?
• Here’s how much I think Lloyds shares will be worth by the end of 2027
• How to target a tax-free passive income of £1,275 a month on top of your State Pension

Suraj Radhakrishnan has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

UK economy and housing

Lloyds is a British retail and commercial bank. It doesn’t operate overseas and doesn’t have an investment banking arm. This makes the firm heavily reliant on the UK economy. As my fellow Fool Roland Head pointed out, Lloyds is planning to enter the landlord market, building and renting out properties to the UK public. It’s already the UK’s largest mortgage lender so has experience in the housing market. And I expect the added revenue from rent to push up the Lloyds share price in the future. However, this move isn’t likely to provide an immediate boost for the bank.

Looking more broadly at the UK economy, it seems a rise in inflation could be on the horizon. Analysts from the National Institute of Economic and Social Research indicated that CPI could rise to 3.9% in early 2022. This is almost double the Bank of England’s target. If this is the case, we will likely see interest rate hikes, which could complement the Lloyds share price as banks will be able to charge higher rates for lending. Again, this factor is likely to be a longer-term benefit for the Lloyds share price, but the coming months may grant more clarity on CPI direction.

Inflation outlook

As Lloyds is so heavily reliant on the UK economy, it’s worth examining inflation forecasts further. In the US, Fed Chairman Jerome Powell has hinted he believes US inflation to be transitory. Most recent price gains have occurred in categories such as cars, flight tickets, and hotel rooms. This is to be expected as the economy reopens after the pandemic. Therefore, it could be rational to assume that any UK inflation concerns may also be short term, which may limit growth in the Lloyds share price beyond 2022.

That said, Michael Sanders of the Monetary Policy Committee (MPC) alluded to a tapering of Quantitative Easing (QE) in July. QE is the purchase of government bonds by banks to create new money in the economy. This signifies longer-term inflation for the UK economy, which could be good news for the Lloyds share price.

Lloyds share price: my verdict

I think the biggest factor for the Lloyds share price moving forward will be how inflation pans out. At the moment, there seems to be no clear-cut direction for future interest rates. I will be closely monitoring the MPC and Fed announcements over the next few months before considering purchasing any UK bank shares.

The post Where will the Lloyds share price move in the future? appeared first on The Twelfth Magpie.

More reading

• Is there any value left in Lloyds shares now they’re over £1?
• Prediction: this UK growth stock will outperform Lloyds shares over the next 5 years
• Barclays, NatWest or Lloyds shares: which is the better pick for a UK retirement portfolio?
• Here’s how much I think Lloyds shares will be worth by the end of 2027
• How to target a tax-free passive income of £1,275 a month on top of your State Pension

Dylan Hood has no position in Lloyds Banking Group. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

In fact, shares in Lloyds have risen almost 60% in the past year, from 30p to 48p. With that in mind, it’s still one of the first banking stocks I’d buy right now.

Lloyds Banking Group’s financials

Lloyds Banking Group is the archetypal high street bank. It makes its money through retail and commercial banking, investments, and long-term savings, like most of its competitors.

Why am I so bullish about it though? After all, Lloyds had a poor 2020. Profits fell 70% year-on-year to £1.2bn due to ultra-low interest rates and lower spending — just two of the many consequences of Covid-19.

But there was a lot to be optimistic about. For the quarter ending September 30 2020, Lloyds held more than £200bn in reserves, a 30% increase year-on-year. Its tier 1 capital ratio — the ratio of Lloyds’ total equity capital to its total risk-weighted assets — was a healthy 15.2% at the end of its last fiscal year.

A rising Lloyds share price 

At its Q1 earnings call in late April, profits were well above estimates. Underlying profits hit £2.1bn, well above the £74m it reported in the same period last year when loan loss charges almost wiped out earnings.

Lloyds also showed its confidence by releasing £323m from a cash pile that was originally intended to cover bad debts in Q1 this year. This was a stark contrast to the £1.4bn charge it took in Q1 2020 and signals subtle confidence that the UK economy will recover well amid ongoing vaccination success.

Not only that, but these are all strong signs that Lloyds is returning to some kind of pre-Covid normality. I also believe that pent-up wanderlust will lead to a rise in holiday and other loans as the British public seeks to truly shake off the shackles of lockdown. 

Risks to Lloyds’ share price

But while the bank’s close-knit relationship with the UK economy is positive for now, that could quickly turn. The global economy as a whole has been devastated by Covid-19, with the recovery expected to be long and arduous. The UK is no exception, and should there be a wave of vaccine-resistant Covid-19, then Lloyds could be back with the issues it faced in 2020. 

What’s more, uncertainties around whether the company will pay a dividend in 2021 are still fresh in investors’ minds. Due to Covid-related Bank of England regulations, the company was forced to set an ex-dividend date (the day on which all shares bought no longer come with the right to be paid) of April 15, with a final payment to come on 25 May. However, as soon as these restrictions are lifted, Lloyds has stated its intention to resume its pre-Covid dividend policy. The only question now is ‘when’ this will happen.

Lloyds’ growth potential

Lloyds is still among the top banks in the UK. It has come through a tough 2020 with plans to expand its small business offering as well as its focus on larger corporate clients. This will reduce its overexposure to loans and interest rates, and could create new avenues to grow profits. I believe that it is an exciting time to buy shares in this bank.

The post If I could only invest in one banking stock, I would buy Lloyds shares appeared first on The Twelfth Magpie.

More reading

• Is there any value left in Lloyds shares now they’re over £1?
• Prediction: this UK growth stock will outperform Lloyds shares over the next 5 years
• Barclays, NatWest or Lloyds shares: which is the better pick for a UK retirement portfolio?
• Here’s how much I think Lloyds shares will be worth by the end of 2027
• How to target a tax-free passive income of £1,275 a month on top of your State Pension

Jamie Adams has no position in Lloyds Banking Group. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

So, I’m wondering if this recent dip from Lloyds provides me with a good buying opportunity, or if it’s just a blip?

A look at its financials

Lloyds had a poor 2020 as profits fell 70% year-on-year to £1.2bn. I believe this was to be expected, especially at a time of ultra-low interest rates. Lloyds generates revenue by taking deposits and lending funds. Low interest rates mean lower returns.

The British banking giant still had plenty of cash on hand to weather increased pandemic costs. For the quarter ending September 30, 2020, Lloyds held more than £200bn, a 30% increase year-on-year. Its tier 1 capital ratio — the ratio of Lloyds’ total equity capital to its total risk-weighted assets — was a healthy 15.2% at the end of its last fiscal year.

Why is the Lloyds share price dipping?

So why is the share price weakening? A potential reason could be Lloyds’ final dividend payment on 15 May. The company went through its ex-dividend date last week on April 15. This means that any Lloyds investors who bought the stock after this are not entitled to the bank’s final dividend payment of 0.57p per share. In my Lloyds article published last week, I mentioned that some volatility could follow.

Another reason could be due to renewed concerns over the fragility of the British economy as we come out of this pandemic. As one of the country’s largest lenders, Lloyds’ stock tends to move in tandem with the UK economic outlook. 

Growth potential

There’s still plenty of bite left in Lloyds Banking Group. The UK banking leader’s open mortgage book grew by £7.2bn in the year. I’m optimistic about this for a number of reasons.

Lloyds is a UK-focused bank now, and domestic mortgages are especially important. Knowing that this important part of its business is growing is a good sign for me. Thankfully, fears that the pandemic would collapse the housing market have not come to pass so far. In fact, we’ve actually seen shares in Britain’s top builders strengthening in 2021 alongside the Lloyds share price.

I also enjoyed seeing customer deposits up by £39bn, with a loan-to-deposit ratio of 98%. Paired with strong liquidity measures, I can’t see Lloyds having cash flow problems at all. And that, I hope, can boost this FTSE 100 company’s share price in the coming years.

My one concern about Lloyds’ share price

My biggest concern about investing in Lloyds right now is the average British person’s savings. By the end of 2020, average savings had increased 25% to 15.6% of disposable income. This savings glut will add £180bn to UK household savings in the five quarters to June 2021. But this wave of deposits isn’t good news for banks, which will struggle to lend people money profitably. Britain’s new-found love of saving could actually drag on the Lloyds share price.

So, should I buy?

I would like to see the economy return to more normality before making a decision about Lloyds’ growth potential. Should its share price fall further, I may reconsider, but for now, I’ll be waiting for better results.

The post Should I invest in Lloyds now as its share price dips? appeared first on The Twelfth Magpie.

More reading

• Is there any value left in Lloyds shares now they’re over £1?
• Prediction: this UK growth stock will outperform Lloyds shares over the next 5 years
• Barclays, NatWest or Lloyds shares: which is the better pick for a UK retirement portfolio?
• Here’s how much I think Lloyds shares will be worth by the end of 2027
• How to target a tax-free passive income of £1,275 a month on top of your State Pension

Jamie Adams holds no position in Lloyds Banking Group. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.