Things are looking up for shareholders in Lloyds Banking Group (LSE: LLOY) this year. Since end-2022, Lloyds shares have leapt by more than sixth (+17.3%). But after a strong start to 2023, will bad news drag down the price?
Lloyds shares gain momentum
Right now, Lloyds shares have upwards momentum. The share price stands at 53.29p, valuing the Black Horse bank at £35.9bn. Here’s how the shares have performed over various periods:
| One day | -0.3% |
| Five days | +0.5% |
| One month | +10.5% |
| Six months | +17.8% |
| One year | +1.5% |
| Five years | -19.9% |
Lloyds shares have gained over periods ranging from five days to five years. They have shown notable strength over six months, jumping by almost 18%. However, they are still down almost a fifth over five years.
After Russia invaded Ukraine last February, stock markets slumped. The Lloyds share price then hit its 2022 low of 38.1p on 7 March. It’s come a long way since, hovering slightly over two-fifths (+40.2%) above this bottom.
Also, the stock is very close to its 52-week high of 53.96p, hit on 11 February 2022. So far, so good. But might it spiral southwards again?
Lloyds looks inexpensive
I’ll quickly run through Lloyds’ basic share fundamentals. Right now, the stock trades on a price-to-earnings ratio of 8.8 and an earnings yield of 11.3%. For the wider FTSE 100 index, these figures are 14 and 7.1% respectively.
In other words, Lloyds shares are ‘cheaper’ than the wider market. Then again, they have performed poorly for year after year.
As for dividend yields, Lloyds offers a cash yield of 4% a year, above the Footsie’s 3.5% payout. But the bank’s payout is covered 2.8 times by earnings — a much wider margin of safety than the FTSE 100’s dividend cover of two times.
British banks face strong headwinds
In my mind, a UK economic recession is almost inevitable. Indeed, the International Monetary Fund has warned that ours will be the worst-performing major economy in 2023. Soaring inflation (rising consumer prices), sky-high energy bills, and rising interest rates are set to hammer UK disposable incomes.
With consumers being squeezed on every front, our economy will most likely see weak or negative growth in 2023. That’s not good news for Britain’s biggest banks, including Lloyds. Thus, I expect bad debts and loan losses to soar this year, hitting bank earnings.
Then again, rising interest rates are a big boost for banks, as these allow lenders to increase their net interest income by widening net interest margins. This will deliver billions of pounds of extra earnings to Lloyds and its peers this year.
To sum up, I feel that Lloyds shares have come a long way in a short time. Hence, we may see some kind of reversal or retrenchment to come. And while I’m positive about the bank’s long-term prospects, I’m wary of the damage that might be done to this year’s earnings.
Lastly, if Lloyds fails to raise its well-covered dividend (or even cuts it), I would expect some price weakness for the shares. Therefore, as we already own a chunk of Lloyds shares in our family portfolio, I won’t buy any more for now. But if the price falls again, I could change my mind!
