The Lloyds Bank (LSE: LLOY) share price has been on the rise for the past few months and it’s even coming close to returning to pre-pandemic levels. But with fears of inflation and rising interest rates slowing down the post-Covid recovery, I wondered what’s really behind this growth in investor confidence, and whether I should add Lloyds to my portfolio.
Share price low
First though, a look at what was previously behind falling investor confidence.
Lloyds has featured prominently in the news for some time now. The banking group made headlines back in June when it announced it would be closing 44 branches around the country. This came on top of the 56 branches Lloyds has previously said it would close in January 2020.
It doesn’t take a genius to work out why it would do this. Branches are expensive in terms of employees, rent and building maintenance. Younger generations prefer to bank online anyway so why would it keep ‘unviable’ branches open?
News of the closures might have been expected to have pushed the share price up, but both of these announcements happened to coincide with some other momentous news. The pandemic and a lawsuit. These two events unsurprisingly reversed the fortunes of the Lloyds share price and it has taken time to recover.
What’s bringing investors back to Lloyds?
I think what’s going on in the housing market is crucial here. House prices across the UK have skyrocketed over recent months and Lloyds announced back in August that it was aiming to buy over 50,000 homes across the country by 2030. It then plans to turn those homes into rental properties. It appears of these acquisitions are aimed exclusively at newly-built homes.
This could push up the Lloyds share price, but there’s an added twist to it.
The Bank of England announced yesterday that it expected to see a sharp rise in defaults over the coming months due to rising interest rates, the end of furlough and cuts to universal credit. While the economy may be opening up again and slowly recovering to pre-pandemic levels, large numbers of people have been left behind by the recovery. Some may be unable to repay their mortgages.
It just so happens that Lloyds is the largest mortgage lender in the country.
Lloyds could sell the homes it repossesses, or they could simply be added to its rental portfolio. Whichever it chooses to do, rising rents and rising house prices will be very profitable in the long term. And the UK’s chronic housing shortage means homes demand (and the mortgage market in which Lloyds is such a big player) remain buoyant. I believe that all of this is a big part of the Lloyds share price surge.
Personally, I don’t think I can add Lloyds shares to my portfolio just yet. The market is already hyper competitive and I’m uncomfortable with the idea of a bank buying up newly-built homes around the country. For now, it’s a no from me.
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James Reynolds holds no share 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.