At 41p, are Lloyds shares now too cheap to miss?

As interest rates rise, Andrew Woods asks if now is the time to load up on Lloyds shares.

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Key Points

  • Interest rates, which dictate how much the bank may charge for borrowing, are on the rise
  • Its forward P/E ratio is lower than the UK banking average, indicating that the shares may be undervalued
  • In the first three months of 2022, the bank stated there was an inflow of £4.8bn from customer deposits

Lloyds (LSE:LLOY) shares have been comparatively resilient in the context of a falling stock market. Currently trading at 41p, however, they still seem quite low to me. The banking giant isn’t part of my portfolio at the moment, but should I add it at some point in the near future? Let’s take a closer look.

Rising interest rates

Rising interest rates have been major news stories recently and this is very important for how Lloyds conducts business. This is because these rates may dictate how much it costs customers to borrow money. This borrowing may take the form of loans and mortgages.

Furthermore, interest rates indicate how much customer cash deposits in the bank may gain over a certain period of time. 

The Bank of England raised interest rates last month to 1.25%. While this is still quite low compared to the last few decades, the Governor of the Bank of England, Andrew Bailey, has indicated that the rate may increase by another 0.5% in August. This could be good news for Lloyds shares.

This could also shield banking stocks from investors who divert cash from the market into higher interest savings accounts.

Strong performance and potential cheapness

For the first three months of 2022, the firm reported that its customer loan book had increased by £3.2bn to £451.8bn, while mortgages had grown by £1.7bn to £295bn. This suggests that Lloyds may be able to take advantage of the rise in interest rates. 

What’s more, the bank has seen continued cash inflows in the first quarter of £4.8bn from customer deposits.

It should be noted, however, that past performance is not necessarily indicative of future performance.

The shares may also be cheap at current levels, given that Lloyds has a forward price-to-earnings (P/E) ratio of 6.54. This is slightly below the UK banking average of seven, and is also lower than rival HSBC, which has a forward P/E ratio of 9.12. 

There are risks associated with investment, however. There is the possibility that the cost-of-living crisis deters potential customers from mortgages or taking on any more debt.

Furthermore, inflationary pressures may lead to customers being unable to keep up with loan repayments. Indeed, the business warned in its first-quarter update that it was concerned about the possibility of loan defaults. 

All of these factors could lead to a fall in the share price.

Overall, there are strong arguments for and against me buying Lloyds shares. While higher interest rates may favour the bank, the broader economic environment may lead to problems in the short term. While I won’t be adding Lloyds to my portfolio any time soon, I won’t rule out a purchase in the future when the economic environment is calmer.

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.

Andrew Woods has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings and 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.

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