Lloyds (LSE:LLOY) shares have bounced up and down this year, but are among the most traded on the FTSE 100. It’s one of Britain’s big three banks, however investors have been deterred in recent months amid concerns about recession in the UK.
Despite this, I’m backing Lloyds to perform in the near term and further into the future. In fact, at 45p, I’m adding more Lloyds shares to my portfolio. Here’s why!
Recent performance
In recent years, the Lloyds share price has been pulled downwards by a host of negative pressure, including uncertainty over Brexit and, of course, Covid-19 and the induced downturn in the economy.
So if I had bought £1,000 of Lloyds shares five years ago, I’d have £680, plus dividends, today. I would have received around £150 over that half-decade in dividends. The figure is perhaps smaller than expected, but Covid-19 disrupted the bank’s payments.
So, clearly, that’s not a great return. In fact, I’d have lost money. But, going forward, I’m bullish on Lloyds.
Near-term outlook
Lloyds is heavily weighted towards the property market and specifically in the UK. UK mortgages represented 61% of Lloyds’ total gross lending at 2021 year-end. And two-thirds of the bank’s income comes from the UK.
But as interest rates rise to levels not seen in a decade, Lloyds and its peers are making more on the money they lend. In fact, these banks are even earning more interest on the money they leave with the Bank of England.
Before last week’s 50 basis points rise, average monthly repayments on mortgages in the UK had already risen by around £70. It’s fair to say these incremental movements in interest rates can make a phenomenal difference to the bank’s margins.
Longer-term prospects
Lloyds is a fairly low-risk investment. It’s constrained by regulation and under the tenure of Antonio Horta-Osorio, the bank lowered its exposure to risk.
While I appreciate housing prices can go down, they fluctuate less than prices of stocks and shares, especially in the long run. Housing is a relatively stable part of the economy and there’s no signs of it slowing down in the long run. After all, in the UK at least, successive governments have failed to address acute housing shortages.
But I also like Lloyds’ move into the rental market. The lender is buying some 50,000 homes over the next decade. I think this is a sound investment, and one that could deliver some impressive margins.
Headwinds
Naturally, an economic downturn won’t be good for banks. Demand for houses will likely dip amid the cocktail of falling economic growth and higher interest rates. And there will be more bad debt.
However, I’d contend that the bank is prepared for an economic downturn amid the checks and balances put in place to prevent these institutions from failing. It doesn’t worry me too much. Plus, in the near term, I’m more excited about the impact of higher rates on margins.
