Lloyds (LSE:LLOY) shares were down 1% after an hour of trading on Wednesday morning. At 43p, the UK banking giant is trading nearer to its 52-week low of 38p than its 52-week high of 53p.
And I find that unusual considering the tailwinds that the banking sector is now experiencing in the form of higher interest rates. So let’s take a look at what’s moving the bank’s share price and why I think this stock could explode in September.
New tailwinds
For over a decade, UK banks have had to deal with near-zero interest rates. This means net interest margins (NIMs), the difference between savings and lending rates, have been very slim.
But that’s all changing. Interest rates have been lifted already this year and they’re tipped to go even higher. Some analysts think they could reach 4% in 2023, and that would be a huge boost for margins. However, it is worth noting that mortgage volumes will likely fall if rates stay that high.
In July, Lloyds said its NIM was now expected to be greater than 280 basis points as interest rates rise. As a result, the bank has raised its forecast for return on tangible equity, a key measure of profitability, to 13% for 2022, up from a forecast of greater than 11% as of March.
Lloyds will even receive more interest on the money it leaves with the Bank of England.
Positive outlook
For years, banks have experienced lower revenues and have been short on the cash required to push forward with new projects. However, higher NIMs should remedy this.
And this is reflected in broker forecasts. Credit Suisse recently said Lloyds was its “top pick” in the UK’s banking sector and gave it a target price of 71p — 66% above the current share price. Meanwhile, analysts at Bank of America recently bumped up their target price for Lloyds shares to 60p.
The bank is something of a safer option too. Last year, 61% of its loans were mortgages. And, in my opinion, that’s pretty safe area of the market. It doesn’t have a big investment arm like other banks — these have been a drag of several of its peers in the last year.
Lloyds is also pushing forward with plans that will see it further its exposure to the housing market. The bank is purchasing some 50,000 homes over the next decade as it enters the UK rental market.
Would I buy Lloyds shares at 43p?
I already own Lloyds shares and, at 43p, I’d buy more. I appreciate that a slowdown in the British economy will negatively impact credit quality but I think this is more than made up for by higher NIMs.
With the banking raking in more money than it has done in years, I’m expecting the Lloyds share price to push upwards in September, or even October, when Q3 earnings are published. A new Prime Minister next month could also accelerate market movements and end some uncertainties.
