The volatility we’ve seen in the financial sector has had an adverse impact on the Lloyds (LSE: LLOY) share price. Despite its solid start to the year, the stock has since taken a hit, now down 2% in 2023.
This only adds to the woes Lloyds shareholders have seen over the past five years. Within this period the stock has fallen by over 25%.
However, I’m a Fool. So with the FTSE 100 bank’s share price now sitting at 46p, I sense an opportunity.
Interest rates
Rising interest rates have been something of a double-edged sword for Lloyds. Hikes by the Bank of England in the past year or so have meant the business has been able to charge customers more when they borrow. This was seen in its latest Q1 results where its underlying net interest income jumped 20%, fuelled by growth in the net interest margin.
With the base rate at 4.5%, many predict this will jump above 5% by the end of 2023. And with its net interest margin predicted to be higher than 305 basis points for 2023, this shows the benefits Lloyds is reaping from higher rates.
Despite this, it’s not all good news for the bank. Rate hikes are a result of racing inflation, which poses a major threat to Lloyds.
With higher inflation comes the risk of recession. And given Lloyds’ sole focus on the domestic market, this places it at greater risk than some of its competitors.
Low valuation and high dividend yield
Despite this, there are other reasons to like Lloyds. The stock has a price-to-earnings (P/E) ratio of just above 6, which to me signals the stock is severely undervalued.
I also like the look of Lloyds because of its meaty dividend yield. It currently offers a yield of over 5.2%, which provides me, to a degree, a hedge against inflation. With inflation set to persist in the months ahead, this stream of passive income could come in handy.
Not only does its dividend yield sit above the FTSE 100 average, but it also trumps that of competitors. By comparison, HSBC offers a yield of around 4.3%, while Standard Chartered comes in at 2.3%.
Despite the troubles we’ve seen in recent times in the financial sector, the business looks safe. Its CET1 ratio, which compares its capital against its risk-weighted assets, sits at 14.1%, above its ongoing target of 12.5%.
The bank also has plenty of cash in reserve, reinforced by its recent announcement of a buyback scheme totalling £2bn.
Where next?
So where does the Lloyds share price go from here?
Well, that’s anyone’s guess. But at 46p, I think Lloyds shares are a bargain buy. While it may face headwinds in the months ahead as interest rates continue to rise, the stock’s low P/E ratio and above-average dividend yield make it attractive.
Lloyds is already a staple in my portfolio. And at its current price I’d be keen to snap up some more shares. Although I don’t have the spare cash right now, should this change in the weeks ahead, I’ll be looking to add some more cheap Lloyds shares to my holdings.
