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The Lloyds (LSE:LLOY) share price has fallen 7% in 2022. I’d consider this decline to be quite mild considering Britain faces its worst recession for decades.
Some investors and market commentators believe Lloyds shares could be past the worst too. So could now be a good time to invest in the bank?
Well, its shares certainly offers attractive value right now, at least on paper. For 2023 Lloyds’ share price carries a price-to-earnings (P/E) ratio of 6.3 times. It also boasts a corresponding dividend yield of 6%.
Rates boost
So what are the pros and cons of buying Lloyds shares? Well one big positive is the probability that interest rates will continue rising.
When interest rates rise, banks have an opportunity to make greater profits. Higher rates widen the spread between what rates these companies can offer to borrowers and to savers.
Higher interest rates drove Lloyds’ underlying net interest income 15% higher in the nine months to September to £9.5bn, latest financials showed.
The Bank of England is tipped to raise its benchmark rate by another 50 basis points later this week (to 3.5%). More hefty hikes are possible in 2023 too as central bank policymakers try to get a grip on rampant inflation.
Regulations shake-up
Lloyds’ profits could receive a significant long-term boost if government plans to shake up regulations are rolled out.
Chancellor of the Exchequer Jeremy Hunt is looking to scrap rules that require banks to separate their retail and investment banking operations. The Treasury hopes the plans will help to “turbocharge” the UK’s economic growth.
Lloyds doesn’t have an investment banking operation today. The business sold off its riskier assets following the 2008 financial crash to rebuild its balance sheet.
But Hunt’s plans could provide an opportunity for the bank to boost profits (and thus shareholder returns) later on, perhaps through acquisition activity.
A troubled UK share
Still, the Treasury’s plans are yet to leave the drawing board. And as things stand today Lloyds faces a prolonged period of weak profits growth. This in turn could affect its ability to increase dividends in the years ahead.
As I say, higher interest rates are something Britain’s banks can look forward to in 2023. But the benefit this will bring threatens to be overshadowed by a toxic uptick in loan impairments.
Lloyds set aside an extra £668m to cover bad loans in quarter three. This meant underlying profit tanked 17% year on year, to £1.7bn.
Clearly, an extended recession could have a catastrophic impact on its bottom line (the Bank of England expects the economy to keep contracting until mid-2024).
The Lloyds earnings outlook looks gloomy beyond the recession too. Structural problems in the British economy (including low productivity growth, high public debt and labour shortages) look set to persist. And at the same time established banks like this one face increased competition from challenger banks.
As I say, Lloyds’ share price looks cheap on paper. However, its low valuation reflects the poor investment case. I’d much rather buy other cheap UK shares today.
