Key points
- With an interest rate hike imminent, the bank may benefit
- A relatively low forward P/E ratio suggests the Lloyds share price is cheap
- Ratings have been steadily improving for this company in recent months
Up 45% from one year ago, Lloyds Banking Group (LSE: LLOY) is a big-hitter within the global banking industry. Like a number of other stocks, the Lloyds share price plummeted when the pandemic hit, almost halving in value. With an interest rate hike on the horizon, however, could this stock now be considered too cheap to miss? Should I be adding it to my portfolio? Let’s take a closer look.
Interest rates
Interest rates have a big impact on the firm, because these dictate how much it can charge customers to whom it lends money. Since the financial crash of 2007 and 2008, UK interest rates have always been below 6%. Following the outbreak of the pandemic, they fell to just 0.1%.
That may have been good news for borrowers, but the effect on Lloyds was that its profit margins were cut. This was chiefly because it was compelled to offer more competitive mortgages and loans. Indeed, way back in February 2020, CFO William Chalmers stated: “There’s no question that the environment presents its challenges, principally in the context of the low interest rate environment. But we do see our business model being the right one.”
It is understandable that investors would view this interest rate climate with some alarm. However, it is likely that the Bank of England will hike interest rates in the coming months. Indeed, it has already begun to do so. With more hikes on the horizon, I think things will start to look up for the Lloyds share price.
The Lloyds share price is cheap
What’s more, it appears that I would be getting a bargain with the Lloyds share price right now. This is because the forward price-to-earnings (P/E) ratio suggests the company is undervalued. With a forward P/E ratio of 7.77, Lloyds is significantly lower than competitors, like Standard Chartered. The latter has a forward P/E ratio of 8.96
Indeed, ratings for Lloyds have been improving through time. Deutsche Bank recently reiterated a ‘buy’ rating for the stock, but increased the target price from 60p to 63p. Furthermore, Citi also stated the business was a ‘buy’ in December 2021.
All of this is very encouraging and, with a dividend yield forecast of 4.8% as mentioned by my Motley Fool colleague Roland Head, it may be helpful for generating passive income.
I think the future is very promising for the Lloyds share price. If interest rates rise, which I suspect they will, this may translate into higher revenues for the bank. While further pandemic variants are always a threat, I think this stock is cheap and I will be buying straight away.
