Here’s why the Lloyds share price continues to tumble

Interest rates are on the rise, yet the Lloyds share price continues to drop. Zaven Boyrazian explains what’s going on with the banking stock.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

sdf

The Lloyds (LSE:LLOY) share price hasn’t exactly been on a great run of late. In fact, despite rising interest rates (which are beneficial to banks), the stock has dropped by almost 15% since the start of 2022.

This disappointing performance has brought the 12-month return to a lacklustre -8%. But why is this happening? And should I be looking at this fall as a buying opportunity or a sign to stay away?

Investigating the potential problem

Lloyds has a lot of moving parts, so there are undoubtedly plenty of factors influencing its share price. However, the main catalyst behind its recent decline seems to stem from inflation.

UK inflation currently stands at around 6.2%, with the Bank of England predicting it could go as high as 10%! That’s obviously bad news for consumers. But for banks, the subsequent rise in interest rates allows profit margins on lending activity to expand significantly. With more money rolling through the door, most would assume the stock to rise. So why isn’t it?

A small amount of elevated inflation is good for banks. But too much and problems emerge. The drop off in consumer spending in inflationary environments can lead to an economic slowdown. With the revenues of both small and big businesses suffering and the cost of debt rising, borrowing activity begins to suffer. In other words, Lloyds’ wider margins are meaningless if fewer people start taking out loans. And if a recession comes along, then the impact only gets amplified.

Can the Lloyds share price bounce back?

In the short term, the situation seems bleak for Lloyds and its share price. But as a long-term investor, that’s of little consequence to me. And looking at the latest quarterly results, it appears most investors are letting their fear get the better of them.

Over the last three months, total customer loans increased by £3.2bn, half of which originated from new mortgages. That brings the total outstanding loans to £451.8bn. And that indicates both consumers and businesses are still using the bank’s lending services, despite the higher cost.

Meanwhile, margins on lending activity, unsurprisingly, have climbed from 2.49% to 2.68%. When combined with the rise in lending activity, net income for the period came in at £4.1bn – 12% higher than a year ago.

This is brilliant news, despite what the Lloyds share price would suggest. And it seems management agrees because it just raised its full-year guidance for 2022. By the end of the year, net interest margins are expected to continue rising beyond 2.7%, while return on equity will climb above 11%.

Time to buy?

In my opinion, Lloyds looks like a fine addition to my portfolio, especially with its share price trading at a relatively tiny P/E ratio of 5.7. The risk of a recession still poses a potentially severe near-term threat. But given the bank’s financial standing, I doubt it will be disappearing any time soon. That’s why I personally think the risk is worth the reward.


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 assessed. Consider taking independent financial advice.

Zaven Boyrazian has no position in any of the shares mentioned. 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.

More on Investing Articles

High flying easyJet women bring daughters to work to inspire next generation of women in STEM
Investing Articles

In 12 months, a £10,000 investment in easyJet shares could become…

easyJet shares have plunged in value following a profit warning on Thursday (17 July). Can the FTSE 100 travel share…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing Articles

This S&P 500 blue chip looks far too cheap to me at $183!

Our writer picks out one high-quality S&P 500 stock that is currently the cheapest among the 'Magnificent 7' group of…

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

Down 23% today! This one’s stinking out my Stocks and Shares ISA

Our writer's wondering what to do with a problem named Ashtead Technology (LON:AT.) in his Stocks and Shares ISA portfolio.

Read more »

Two male friends are out in Tynemouth, North East UK. They are walking on a sidewalk and pushing their baby sons in strollers. They are wearing warm clothing.
Investing Articles

Down over 20%, should I dump this FTSE 100 dividend stock?

Our writer has been loving the passive income this dividend stock has been throwing off. But does the big share…

Read more »

Businesswoman calculating finances in an office
Investing Articles

I’ve just bought this FTSE share…

Our writer explains the thought process that led to him buying this FTSE share. One that’s likely to do well…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Just over £5 now, easyJet’s share price looks cheap to me anywhere under £13.84

easyJet’s share price has dropped recently, which could mean the business is worth less than before. Conversely, it could mean…

Read more »

Trader on video call from his home office
Investing Articles

36% under ‘fair value’ and forecast annual earnings growth of 6%, should investors consider this FTSE 250 stock?  

This FTSE 250 firm is a leader in a growing sector and has secured several new sites to drive its…

Read more »

Portrait of a boy with the map of the world painted on his face.
Investing Articles

3 UK shares that have recently become takeover targets

Mark Hartley examines why these three UK shares have become takeover targets and could be bought out by rivals in…

Read more »