Lloyds (LSE: LLOY) shares have been steadily climbing. In fact, they’ve generated a healthy 9.7% return for investors over the past six months and 17% over a year. In the current choppy macroeconomic climate, are these shares too cheap for me to miss under 50p? Let’s take a closer look.
Streamlined business
Lloyds had a pretty rough time in 2020, as the pandemic forced branch closures across the UK. Many small businesses that had loans from Lloyds were struggling, and hence repayments came under strain. As a consequence, Lloyds incurred a £4.2bn loan impairment charge. All of these factors led to Lloyds generating just £1.2bn in pre-tax profits for the year.
However, under new leadership of Charlie Nunn, things seem to be turning around. For a start, the firm has announced it’s looking to expand back into the wealth management and investment banking space. In addition to this, it has planned to become the UK’s largest private landlord through its Citra Living venture. Both of these seem like good moves to diversify the bank’s income streams.
The bank has also announced it will be shutting 60 UK branches, recognising the consumer trend towards online banking. While it’s never easy to lay off workers, this will help the firm cut a huge sum from expenditures. I expect these funds to be reinvested in the new projects Lloyds has in the pipeline.
Lloyds shares valuation
Another reason why the shares look attractive to me is due to their cheap valuation. They currently trade on a price-to-earnings (P/E) ratio of just 6.68. This is well below the 10 P/E benchmark I use to look for cheap stocks. In addition to this, Lloyds shares offer a whopping 5.1% dividend, which is a great consideration for passive income.
Rising inflation and interest rates
Inflation has been soaring in recent months, due to a combination of pandemic-induced supply issues, low rates, and fiscal stimulus. What’s more, the Bank of England expects inflation to reach 8% in the UK by later this spring. To combat this, the BoE has been increasing interest rates, most recently to 0.75%. I think this is a double-edged sword for Lloyds.
On the one hand, it means that Lloyds can charge more when lending to customers. This could help bring in extra revenues. On the other hand, it reduces the likelihood of people taking out loans from the bank and slows the growth of the UK economy. This could be bad news for Lloyds.
The verdict
Overall, I like the look of Lloyds shares. I think they offer great value and coupled with a healthy dividend they could be a great way of generating passive income for my portfolio. Although rising interest rates might pose a threat to the bank, the expansion plans excite me enough to buy the shares while they’re still cheap.
