Could the Lloyds share price start to turn around in November?

The Lloyds share price has sunk by a fifth over the past year. Could rising interest rates help the bank — or might they hinder it?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Bearded man writing on notepad in front of computer

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

It has been a disappointing time to be a shareholder of banking giant Lloyds (LSE: LLOY). Last November the shares started the month trading just above 50p apiece. Since then, the Lloyds share price has fallen 20%.

But there are signs of positive news for the banking industry as interest rates rise. So, should I start buying Lloyds shares again now for my portfolio while I can still bag them at the current price?

Some good news for banks

Higher interest rates can be bad for borrowers because they need to pay more when servicing their loans. But that can be good for banks as they stand on the other side of the transaction. As the UK’s largest mortgage lender, I think this could be a key benefit for Lloyds from interest rate hikes. That might help support an increased share price.

Indeed, in the bank’s third-quarter trading statement released last week, there was already evidence of this happening. Underlying net interest income for the first nine months came in at £9.5bn, a 15% increase over the same period last year. I expect interest income may remain elevated for the foreseeable future due to higher rates.

Bad news too

But already we also see some evidence of how higher interest rates, along with a worsening economy in general, could be bad for the bank’s financial performance.

Statutory profit before tax for the quarter fell 26%. It still came in at £4bn, which is a lot. Lloyds has a market capitalisation of £28bn, so its shares continue to trade on a low price-to-earnings ratio. That could make its current valuation look attractive. But the fall is a large one. Moreover I think we are only seeing the start of how higher interest rates might impact profits. Next year could be worse.

The financial services powerhouse also changed its outlook for the year, specifically citing interest rate changes as a risk when it referred to “the balance of risks shifting from Covid-19 to increased inflationary pressures and rising interest rates”.

That led to a gloomier outlook than Lloyds had before. For example, it increased its expected credit loss in the first nine months of 2022 from £4.5bn at the start of the year to £5bn now. Big interest rate rises have only kicked in fairly recently for many borrowers, so I think such news could get worse over the winter and into 2023.

I’m not tempted by the Lloyds share price

That is why, despite the Lloyds share price falling and a dividend yield now exceeding 5%, I will not be adding it to my investments any time soon.

I think it has real strengths, from its large customer base to a strong assortment of banking brands. If investors focus on those and the economy suddenly shows signs of recovery, the Lloyds share price could start to turn around.

I would be surprised to see that in November though. The UK economy is struggling and rising interest rates could mean higher default rates eating further into Lloyds’ profits.

That could be bad for the Lloyds share price in November and beyond. For now I see better opportunities for my portfolio elsewhere in the UK stock market.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Affectionate Asian senior mother and daughter using smartphone together at home, smiling joyfully
Investing Articles

How I’d invest my first £20k ISA to target £4,900 a year from dividend shares

Looking for dividend shares in a new Stocks and Shares ISA, and want diversification too? Here's how I'd go about…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »