Is the Lloyds share price set to rocket as interest rates rise?

The Lloyds share price is on a roll as investors anticipate more interest rate rises, but are the shares too high already and poised for a fall?

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It’s no real surprise to see the Lloyds (LSE: LLOY) share price is up over the last 12 months. The primary reason is the expectation that interest rates will keep going up throughout 2022, which is good for banks’ bottom lines.

Up, up and away… or a value trap?

The consensus view is that because inflation is surging (up over 5% in the UK and even higher in the US), interest rates will need to go up again. I’m no economist but this seems a very likely scenario. That being said, as a long-term investor the short-term picture doesn’t interest me that much. Yet it’s distinctly possible that rate rises could fuel further Lloyds share price growth. 

On the other hand, to what extent is that expectation already built into the Lloyds share price? It’s no secret that rates will very likely keep going up, hence the share price has already risen strongly. It’s possible that buying now is a case of arriving late to the party. How much further share price growth could there be? That’s hard to know. Valuation is inherently tricky, always involves assumptions, and valuing banks’ profitability is even more difficult than for simpler businesses. That’s one reason to avoid them as renowned UK investor Terry Smith does. Indeed, he’s been scathing in the past about banks as an investment.

On the other hand, for those who think Lloyds could do well, there’s also the added bonus of its growing dividend, raising the possibility of the bank as an income and growth share, which is a great combination.

However, it’s probably worth considering the poor historical share price performance. Over five years, even after the recent improvement, the shares are down 20%. The FTSE 100 over the same timeframe is up about 5%. The bank does have a relatively new CEO and is expanding into new areas such as becoming a landlord. This could attract a premium compared to other banks as investors anticipate higher margins and more revenue in future. It’s also a sign management is thinking outside the box to grow the business, which is always nice to see. So there are certainly positives. 

The bank’s UK focus is potentially both a blessing and a curse depending on local economic growth. A UK focus makes the business simpler and helps it have a lower cost base, which is better for profitability. The flipside is it is less diversified and so if the British economy falters, the Lloyds share price may well also struggle.

Final thoughts on the share price

The share price has had a good run over the last year, largely as a result of anticipated interest rate rises and partly from fewer bad loans from the pandemic, yet with my long-term focus, I don’t find investing in Lloyds to be that attractive. The share price should be a beneficiary of rising interest rates. And yet, its long-term record is pretty woeful, so I’ll likely avoid it and add to stocks about which I have much more conviction, such as CMC Markets and Polar Capital.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Andy Ross owns shares in CMC Markets and Polar Capital Holdings. The Motley Fool UK has recommended Lloyds Banking Group and Polar Capital Holdings. 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.

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