Over the past year, the Lloyds (LSE:LLOY) share price has been volatile. In an environment of rising interest rates and rampant inflation, the bank has enjoyed increased revenue and profits. However, are the shares all they’re cracked up to be? Let’s take a closer look.
Is it really a bargain?
In the past year, the shares are down 10% and over the last six months they’ve fallen by 23.55%. At the time of writing, they’re trading at just over 42p.
I’m keen to know if I’d be getting a bargain by buying the shares at current levels. One metric to gauge cheapness is price to earnings (P/E) ratios and comparing Lloyds to a number of competitors within the sector.
The lower the number, the higher the chance that I’d be getting a bargain.
|Forward P/E ratio
As we can see, Lloyds appears to have quite a low ratio, beating both HSBC and Standard Chartered. However, it’s higher than Barclays. While Lloyds shares may be reasonable value, they may not be the best value on the market.
Rising interest rates, surging profits?
Much of Lloyds’ business depends on borrowing, through customers taking out loans and mortgages. To that end, interest rates are important for the bank because they largely dictate how much it can charge for these products.
In the UK, interest rates recently reached 1.25%. While this is still small when compared to other periods in history, it’s the highest in the last few years. What’s more, the Bank of England expects to make further rate rises in the coming months. This could be up to 0.5% increases.
This might be good news for Lloyds, because it may be able to charge more for its products. Indeed, the banking firm has already been benefiting from this. In 2020, pre-tax profits stood at just £1.2bn. The following year, as interest rates climbed, pre-tax profits rose to £6.9bn. It’s important to note, on the other hand, that these profits are obviously not guaranteed to continue in the future.
There’s the chance, however, that rising interest rates cause a slowdown in the mortgage and loan markets. Considering all the other pressures on customers at the moment, including inflation and surging energy prices, it’s quite possible that demand for Lloyds’ products may decline.
Despite this, none of the major housebuilders, like Barratt Developments or Persimmon, have reported any drop in sales for houses in recent months. This may at least indicate that mortgages are still in demand.
Overall, Lloyds presents an interesting opportunity to tap into a market currently benefiting from broader economic factors. How long this favourable climate will last, however, is anyone’s guess. I also think I can find better value elsewhere in the sector, so I won’t be adding the company to my portfolio any time soon.