Shares in Lloyds Bank (LSE: LLOY) are having a good run at the moment. Since mid-September, Lloyds’ share price has spiked higher, and today, it’s not far off 50p.
I already have a small position in Lloyds so I’m happy with the recent share price rise. Should I buy more shares for my portfolio? Let’s take a look.
Can Lloyds’ share price keep rising?
While the Lloyds share price has already risen substantially over the last year, I think it has the potential to keep rising in the near term.
One reason I’m optimistic on the outlook for the stock is that it’s looking more likely that the Bank of England (BoE) will raise interest rates in the near future. According to Reuters, the market now sees a 90% probability of the BoE lifting interest rates from the emergency level of 0.1% to 0.25% at next month’s meeting on 4 November.
I don’t know for sure if we’ll see an interest rate hike next month. But I do think we’ll see one from the BoE sooner or later. And that would be good news for Lloyds. That’s because higher interest rates allow banks to earn a larger spread between the rates they charge to lend money and the rates they offer to borrow money. A larger spread generally leads to greater profits.
Another reason I’m optimistic here is that I think we could see more money flow into ‘cyclical’ stocks as investors attempt to capitalise on the global economic recovery. Banks like Lloyds are inherently cyclical so this sector could benefit. This could support Lloyds’ share price.
A third reason I’m bullish on Lloyds is that the stock remains very cheap. Currently, City analysts expect the bank to generate earnings of 7.32p per share this year. If that forecast is accurate (earnings forecasts should always be taken with a grain of salt), Lloyds shares currently have a forward-looking price-to-earnings (P/E) ratio of just 6.7. That’s extremely low. I don’t expect the stock to remain that cheap forever.
Should I buy more Lloyds shares?
As for whether I should buy more Lloyds shares for my portfolio, I’m not sure that’s the best idea.
For starters, I don’t want to be over-exposed to the stock. Lloyds is not what I consider to be a ‘high-quality’ stock. A look at the financials shows that profitability tends to fluctuate wildly and the dividend track record is patchy. The share price is highly volatile too. I’d rather allocate fresh capital to higher-quality names.
Secondly, I’m not convinced that the outlook for banks is attractive in the long run. New digital banks such as Monzo and Revolut are rapidly capturing market share today and we’re likely to see an enormous amount of disruption in the banking industry over the next decade. Realistically, I don’t think anyone knows what banking is going to look like in 2030 given how fast financial technology is moving today.
All things considered, I’m happy with my small position in Lloyds for now. If the share price continues to rise, I’ll benefit. However, if the stock experiences weakness, I won’t lose my shirt.
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Edward Sheldon owns shares of 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.