Rising interest rates were supposed to be a fantastic growth catalyst for the Lloyds (LSE:LLOY) share price. Yet, throughout 2023, the British banking giant saw its market capitalisation move firmly in the wrong direction. And since 2024 kicked off, this downward trajectory has only continued, with shares dropping by a further 10%.
Banks are complicated businesses, making it harder to pinpoint exactly where the problem lies. However, with the US banking sector showing weakness, it seems the confidence surrounding Lloyds has suffered.
So is there cause for concern? Or is this a buying opportunity? Let’s take a closer look.
The threat of interest rate cuts
Earlier this month, US institutions like JP Morgan, Bank of America, and Goldman Sachs released their latest earnings. Despite most delivering encouraging performances, shares ended up sliding as investor confidence in this sector is weakening.
The cause once again appears to be tied to interest rates. With US inflation back under control, the Federal Reserve is planning to start cutting rates in the second half of 2024. While that’s fantastic news for most businesses, for banks it means net interest margins are going to fall under pressure once again.
UK banks operate slightly differently. But they’re exposed to similar catalysts. And with the Bank of England planning to follow in the Federal Reserve’s footsteps, it’s not surprising to see the Lloyds stock price suffer. It’s worth pointing out that HSBC and Barclays have also suffered as a consequence.
Another scandal on the horizon?
Yet, Lloyds has another problem on its hands called the Financial Conduct Authority. Regulators have begun investigating over 16,000 claims of foul play where car finance customers were charged higher interest rates so that car dealers could receive undisclosed commissions.
The investigation has only just started and likely won’t conclude until towards the end of 2024. However, if Lloyds is found guilty, analysts have predicted the bank may be forced to repay between £1.5bn and £2bn as part of a compensation scheme. Needless to say, that’s not good news for shareholders.
Correction: The previously quoted figure of £8bn is the estimated fine across the entire banking sector, with Lloyds assessed to be exposed to up to £2bn of this potential penalty based on analyst consensus.
Time to buy?
Contrarian value investors are known for buying up stocks and getting hit by short-term scandals or problems. After all, if the underlying business remains uncompromised then, in the long run, such sudden drops in valuation present a potentially lucrative buying opportunity.
Lloyds’ latest earnings report is scheduled for February this year. This will help illuminate the true state of the bank in the wake of upcoming interest rate cuts. And if they’re anything like the last set of results, then today’s price could be a screaming buying opportunity. After all, pre-tax profits across the first nine months of 2023 were up by 20%, beating analyst expectations.
Having said that, this isn’t exactly a business I’m keen on having in my portfolio. Despite playing a critical role in the global economy, Lloyds shares, despite their general popularity, haven’t exactly been a stellar performer in over a decade. Therefore, this business is staying on my watchlist, even with the cheap valuation.
