After reaching levels around the 50p mark in early June, Lloyds Banking Group (LSE:LLOY) shares have been losing momentum. The slow trend lower hasn’t been broken since then, leaving the shares around the 42p mark as I write. They’re down 10% over three months but up 60% over one year. The half-year report released at the end of July wasn’t enough to shake the share price into action. So what’s going on here?
Half-year results
One of the main events for Lloyds shares since early June has been the half-year results. I thought the tone of the report was broadly positive. Net income rose by 8% versus H2 2020. Underlying profit rocketed higher by 64%, helped in part by lower restructuring costs.
On the downside, net interest income was only up 2% versus H2 2020 and actually down 1% from H1 2020. Net interest income is the key way that the bank makes money. This is the measure of the difference between the income it receives from interest-bearing assets versus what it pays out on interest-bearing liabilities.
The struggle in terms of growing that net interest income is one reason why I think Lloyds shares have been coming lower in recent months. One way that the bank can increase this is if interest rates set by the Bank of England are raised. We’re seeing higher inflation in the UK, which could lead to higher interest rates down the line. However, it’s unlikely that this will happen before next summer, and even then only by 0.1-0.25%.
An uncertain future
Another reason why I think Lloyds shares have been stalling recently is that sentiment is uncertain regarding the future state of the UK economy. The vaccination rate is high, but new variants keep cropping up. Talk of booster jabs being needed in the winter, along with a possible circuit-breaker lockdown are in the news.
Lloyds shares do have a high correlation to the concerns around the UK, as it’s a UK-focused company with a domestic client base. Therefore, unlike more global banks, the state of Britain’s economy substantially impacts financial performance.
Seeking direction for Lloyds shares
Personally, I think that Lloyds shares could continue to meander in the range between 40-45p in the absence of fresh news. I think that the downtrend could be halted closer to 40p, as dividend investors could then be adding this stock to their portfolios.
The falling share price has pushed the dividend yield close to 3%. If the share price falls a little more, the yield will be above the FTSE 100 average. So from this angle, income hunters could buy.
On the upside, I think that we would need to see some positive news come out regarding the UK economy and Covid-19 to really lift the shares back towards 50p. Alternatively, the next quarterly update in the autumn could help if the numbers beat expectations heading into the end of the year.
Ultimately, I won’t be buying Lloyds shares now as I think there are better opportunities elsewhere. My lack of firm conviction on the bank means I’m happy to pass up this investment opportunity right now.
