With only a few trading days left in the year, I’m starting to review the annual performance of my stock market holdings. For context, the FTSE 100 index has declined around 1.5% in 2022 so far. Against that benchmark, I’m disappointed to see Lloyds (LSE: LLOY) shares underperformed.
The Lloyds share price has fallen nearly 9% this year and my position’s in the red. So, will the black horse bank perform better next year and what should I do with my shareholding?
Here’s my take.
Mediocre returns
The UK’s largest mortgage lender had a fairly unremarkable 2022 compared to its closest competitors.
In terms of capital growth, Lloyds fared better than Barclays but lagged behind HSBC and Natwest. Both of them have eked out positive returns so far this year.
| FTSE 100 bank stock | Year-to-date performance |
|---|---|
| Barclays | -22% |
| HSBC | +4% |
| Lloyds | -9% |
| Natwest | +2% |
Over the past half decade, it doesn’t stack up much better. All four banking stocks delivered a negative return, excluding dividends. Lloyds comes in second-last again, marginally trailing HSBC.
A passive income stock
Despite a disappointing capital return, Lloyds shares occupy an important position in my passive income portfolio. How do they stack up against their Footsie bedfellows in terms of dividends?
| FTSE 100 bank stock | Dividend yield |
|---|---|
| Barclays | 4.1% |
| HSBC | 4.4% |
| Lloyds | 4.7% |
| Natwest | 4.6% |
Perhaps buoyed by the downtrodden share price, Lloyds’ dividend yield is at the head of the pack. I look forward to seeing whether the bank can continue to add value for shareholders next year, building on the generous £2bn share buyback programme it completed in 2022.
House prices
Given the size of its mortgage book, I think house price fluctuations are a key risk facing Lloyds shares next year.
The most recent analysis from economists at the Office for Budget Responsibility (OBR) is rather gloomy.
House prices are forecast to fall by 9% between the fourth quarter of 2022 and the third quarter of 2024, largely driven by significantly higher mortgage rates as well as the wider economic downturn.
OBR, 17 November 2022
The bank’s central forecasts are largely in line with the OBR’s. However, in a “severe” economic slump, Lloyds anticipates house prices could fall nearly 18%.
A housing market downturn would likely hit the share price. To some extent, higher interest rates might offset the damage, but it’s hard for me not to conclude that 2023 could be a tricky year for the banking group.
Taking a longer view, fundamental supply and planning issues remain in the UK property market. Plus, there’s an enduring British enthusiasm for investing in bricks and mortar. House prices could march higher the other side of an economic downturn.
Nonetheless, I’m concerned this could take a while. At present, the Bank of England expects a relatively shallow but long recession.
Should I buy, hold or sell?
I recently bought more Lloyds shares at prices similar to today’s level near 45p. I think next year could provide some good buying opportunities amid the headwinds the bank faces.
Today, I’m holding, but I’m keeping my eyes peeled for potential long-term bargains in 2023. In the meantime, I’ll keep reinvesting my Lloyds dividends into my passive income portfolio.
