The Lloyds Banking Group (LSE:LLOY) share price is up only 2.6% over the past year. Even with the performance broadly flat, it has peaked around 55p and traded down to 38p during this period. Unfortunately, I think that positive momentum is fading for the Lloyds share price. Here’s why.
Fewer rate hikes than expected
One of the main pillars of strength that helped the Lloyds share price jump to 55p in late Q4/early Q1 this year was optimism around interest rates. Investors speculated that the Bank of England would need to raise rates significantly in 2022 in order to stem the rising inflation.
The central bank has followed through to some extent, raising rates several times to have a base rate of 0.75% at the moment. But the cloudy economic outlook has started to make some analysts rethink further hikes for this year. After all, raising rates more is only going to stem demand, at a time when the economy needs to be supported.
This is negative for a bank like Lloyds (if realised). It makes the majority of revenue from the net interest margin. This is a measure of the spread between the rates paid on deposits versus the rate charged on loans. A higher central bank rate allows Lloyds to increase this spread. So if expectations are now more muted, future earnings for the firm are also called into question.
Muted consumer activity
Another point of concern I have relates to higher energy costs in the UK. These have spiralled over the past month, with some calling out a looming cost of living crisis. Like many others, I nearly fell off my chair when my updated gas and electricity tariff came through a few weeks back.
This could hamper the Lloyds share price because investors will think about the impact that such a crisis would have on the bank. In comparison to peers that have established investment banking arms and a broader geographical reach, Lloyds is primarily a retail bank for UK consumers. Therefore, it feels the pinch based on the welfare of the average person on the street.
A higher cost of living will likely see spending on payment cards dry up. Deposits could fall as savings are used to pay for bills. Loan defaults could increase, and credit card costs could also spiral. If this gets compounded on a large scale, the bank could really struggle to grow revenue and profit for 2022.
Will I buy?
Despite the concerns raised, I could be wrong about the future direction for the shares. For example, I think the bank is making the right decisions to shift focus towards online banking. It recently announced 60 branch closures for this summer. The short-term pain here should be offset by the gains further down the line of an efficient online offering to customers.
On balance, I’m going to hold off investing in Lloyds shares for the moment though. I don’t think the shares are going to crash, but I struggle to see a tasty return available at current levels.
