Investors have been bearish on Lloyds (LSE:LLOY) shares for a few months now. Ever since hitting post-pandemic highs of 55p in January 2022, Lloyds shares have fallen over 20%. They are currently trading at 43p. But all this could change in the coming months. Sings of economic recovery are getting stronger. And with the bank of England (BoE) set to meet in August, I think this could be the perfect time for me to capitalise on the cut-price Lloyds share price before it returns to pre-pandemic highs.
BoE’s woes
In order to curb inflation in the UK, the Bank of England has steadily increased interest rates this year. After the last hike, interest rates stand at 1.25%, up from 0.1% in December 2021.
The committee that decides interest rates is set to meet again on 4 August and BoE Governor Andrew Bailey has warned that another 50-point hike is on the table. This would take the interest rate to 1.75%. And given that most estimates suggest an 11% inflation rate by the end of the year, I think the BoE will go through with the 50-point hike.
The base interest rate hikes throughout this year have already caused a 10% jump in net interest income for Lloyds in the first quarter (Q1) of 2022. And with the banker set to release half-yearly results on 27 July, I expect a similar bump in earnings. But can the extra cash from interest payments alone boost the Lloyds share price?
The Lloyds share price offers value
There is a simple equation to factor in here. Higher base interest rates equal higher earnings for Lloyds bank. And the gap between the interest paid by Lloyds on cash held in accounts (which is expected to remain stable) and the interest received from loans will grow wider.
Also, this is a positive sign for Lloyds shares’ yield of 4.57%. Given the strong cash generation, the board expects to increase yield progressively starting from 2021’s dividend of 2p per share. The Lloyds dividend also comes with an earnings cover of 3.9 times.
Given these factors, I think the Lloyds share price offers decent value at its current levels. But there are factors that could trigger a further collapse as well.
When the economy suffers, consumer buying power decreases. And the latest retail sales data backs this up. Fuel, clothing, and housing goods sales all fell by over 3.5% in June 2022. And online sales figures are falling rapidly after seeing a huge surge during the pandemic. Online sales fell by 3.7% last month and accounted for just 25.3% of total retail sales in June, compared to 37.4% in February 2021.
Another factor to consider is how much the average investor would be willing to invest in a recession. Daily trading volume has fallen 23% since March 2022. This is a strong sign that investor activity will drop rapidly if the UK government announces a recession.
However, the Lloyds share price looks more attractive to me compared to other top UK bankers. It’s cheap right now, has a robust yield, and could continue to generate higher revenue for the foreseeable future. I am waiting for the results later this week and would add Lloyds shares to my portfolio if the market reaction is favourable.
