Lloyds Banking Group (LSE: LLOY) shares have been picking up a bit. But they look like they’re holding around that stubborn 50p level again.
Will the upwards trend stick this time, and could the Lloyds share price end the year significantly ahead of where it is now?
I’m looking at three things that I think could give Lloyds a boost in 2023.
Results
Results for 2022 are due on 22 February. But it’s not last year’s figures I really want to see. I’ll be looking for the bank’s take on how rising inflation and interest rates in the latter part of 2022 are likely to affect its outlook in 2023.
Already, inflation looks looks set to peak quite a bit below the scary 14-15% levels that were being suggested just a few months ago. Will that mean a quicker reduction in interest rates? I hope so.
High interest rates are double-edged for Lloyds. They boost lending margins, which is good. But they also raise the risk of defaults among the bank’s mortgage customers.
I want to know where Lloyds’ bad debt provisions are heading. And how big a problem the board thinks they might be. And then, guidance on cash flow and dividends are high on the agenda.
Economy
Broadly speaking, the banks are pretty much held hostage to the economy. And there’s a potential double hit for Lloyds, as a tight economy is already damaging the housing market. That’s not good news for the UK’s biggest mortgage lender.
We had appeared to be heading for a painful recession. But the threat of that is easing off, and there are even signs of economic growth showing. Oil prices are rising again though, so we’re not out of it.
An economic squeeze can hit bank stocks more than most. But they can gain nicely when sustainable growth returns. I think the first half of the year could be key.
Sentiment
I always make one mistake with Lloyds. I underestimate the market’s ability to remain steadfastly bearish towards it.
Even now, with the Lloyds share price still depressed, we’re looking at a forecast price-to-earnings (P/E) ratio of only a little over seven. That’s around half the FTSE 100‘s long-term average. And the predicted dividend yield is up at 5%, and rising strongly based on the next two years’ forecasts.
For most of the past decade, I think Lloyds shares have been undervalued. That’s great for investors topping up their long-term holdings. But we’ll surely need a sentiment change if we’re to see much progress this year.
Verdict
There are some clear dangers ahead in 2023. And I suspect investors could be a bit jittery for some time to come, until we actually see an easing of the world economy, and maybe even an end to the war in Ukraine. And we might need a good year or two of earnings growth at Lloyds before the shares get back to where we might hope.
I still rate Lloyds shares as a long-term buy. But yet another weak year wouldn’t surprise me.
