Lloyds (LSE: LLOY) shares have plummeted this week. With the stock down around 17% in 2022, it has fallen by 9% in the last five days alone.
The business has been a victim of the large drop we’ve seen in global markets in the last few days as a piling up of pressures continues to worsen the economic outlook.
However, I’d rush to add the FTSE 100 bank, currently trading for 41p, to my portfolio. Here’s why.
The story so far
Clearly, it’s been a tough year for Lloyds. Inflation has been on the rise. And as such, investors have lost confidence in the market. Rates have been above 10% in the UK and the US at times this year. And as a result, the FTSE 100 is down by over 8% in 2022.
The last five years have also followed a similar trajectory for Lloyds stock. In September 2017, a share in the bank would’ve cost around 68p. Today, it’s 40% lower.
Not all bad news
Despite its poor performance, I think now is a great time to load up on some shares.
The first reason for this is rising interest rates. To fight back against spiking inflation, the Bank of England has been hiking rates. Last week saw the central bank set the rate to 2.25%, a 50 basis points rise. There’s also large speculation that it could reach nearly 6% come next spring.
For Lloyds, this is a positive. This is because higher rates will allow the firm to charge customers more when they borrow from the bank. In turn, the firm will be able to increase net interest margins.
On top of this, I also like the stock because of its low valuation. It currently trades on a price-to-earnings ratio of 6.8, sitting well below the ‘benchmark’ of 10 and the average of its FTSE 100 peers.
Racing inflation also means I’m looking to create streams of passive income. With its 5.1% dividend yield, Lloyds offers this.
With this said, there are a few issues I have with the stock.
Firstly, should interest rates reach as high as predicted, customers are more likely to default on payments.
On top of this, with its sole focus on the domestic market, Lloyds is more prone to the impacts we’re set to see as the UK economy weakens. The impact of the next few months could set Lloyds back in the near term.
As one of the UK’s largest mortgage lenders, the weakening housing market may also spell trouble for the business.
However, its new rental venture, Citra Living, will help it to offset risk through this diversification.
Why I’d buy
So, while the short term may be rocky for Lloyds, I see long-term value in the bank’s shares. The rise we’re set to see in interest rates will benefit it. And with its high dividend yield and low valuation, I think the stock is a smart buy below 45p. I’d happily add Lloyds shares to my portfolio today.