Are Lloyds shares a good investment?

Lloyds shares are trending lower, but the underlying bank benefits from rising interest rates. Is this a buying opportunity for investors?

Lloyds Banking Group (LSE:LLOY) is a financial services group focused on retail and commercial clients. It has branches across the UK with a wide customer base. And yet Lloyds shares have delivered fairly disappointing returns over the last decade.

The banking group recently achieved a 10 percentage point increase in business confidence. This is the highest level the bank has reached since February 2022. I think this is a big boost for investors and good news for the future of Lloyds shares. This has been a great achievement considering rising inflation and the cost of living crisis. So is now the time to add this bank to my investment portfolio?

Key points

• The banking group achieved a 10 percentage point increase in business confidence.
• The loan-to-deposit ratio reached a healthy 96% during the second quarter of 2023.
• Analysts have a joint consensus on a moderate buy and/or hold for Lloyds shares.

What does Lloyds do?

Lloyds is a leading financial services bank based in the United Kingdom with a century-old history. Its customer base is around 30 million and it has a support employee base of more than 65,000.

Lloyds shares are currently trading at 44p. With approximately 70 billion shares outstanding, the banking group’s market capitalization stands at £28 billion.

What do the finances look like?

The banking group proudly reported strong financial performance during the half-year of its fiscal 2023 ended in December. It continued to deliver on its strategic ambitions and is well positioned to deliver for all stakeholders.

Net income amounted to £9.2 billion, an increase of 11% on the same period last year. Underlying net interest income was £7 billion, with a net interest margin of 3.18%. In quarterly terms, the net interest margin was recorded in the second quarter at 3.14%, which represents a reduction of about eight basis points compared to the first.

This reduction is due to expected headwinds from mortgage and deposit prices. However, it’s worth noting that both levels of profitability were higher than management expected.

Amid all this, the loan-to-deposit ratio reached a healthy 96%, reflecting the stability of the banking group’s balance sheet.

The bullish case for the Lloyds share price

At a trading price of 44p, Lloyds shares are in a downtrend after reaching a previous high price of 53.33p in February 2023.

The bank continues to proactively reach out to its customers to offer support due to the rising cost of living. Additionally, they have committed to the Government’s Mortgage Charter and six-month advance product transfers are now available for residential mortgage customers.

I think this is an excellent step in these difficult times to maintain and grow the customer base.

The bearish case for the Lloyds share price

One of the biggest risks facing the banking sector is the risk to earnings and capital from interest rate movements. However, the centuries-old history of business comes in handy in difficult situations like this.

The banking group manages these risks by covering net liabilities, which are stable or less sensitive to rate movements. As at 30 June 2023, the Group’s structural cover had an approved capacity of £255 billion. This figure remained stable as of December 31, 2022 at £255 billion.

Lloyds share price prediction

Analysts have a joint consensus on a moderate buy and/or hold for Lloyds shares. The expected price for Lloyds Banking Group was set at 63p and the lowest at 44p. Compared to the current share price, this would suggest that the stock is fairly valued or has some room to grow. Of course, it’s critical to remember that forecasts are rarely accurate, and it’s entirely possible that analysts have overlooked an important factor that could prevent such a performance from coming to fruition.

Should you buy Lloyds shares today?

Analysts believe Lloyds will benefit from rising interest rate rises. But in case of any economic rise or fall, the future cannot be predicted.

Don’t forget that while higher interest rates are good for credit margins, they also make it more likely that customers will default on their loans. In fact, evidence of this is already starting to materialize: the total loan portfolio is starting to shrink while impairment charges are rising.

Despite all this, the banking group was able to report a higher profit than the previous semi-annual report, indicating strength and resilience. Therefore, I remain cautiously optimistic about the long-term potential of this company and am considering adding it to my personal income portfolio.

Saima Naveed does not own shares in any of the companies mentioned. The Money Cog has no position in any of the companies mentioned. The opinions expressed about the companies and assets mentioned in this article are those of the author and therefore may differ from the opinions of The Money Cog Premium Services analysts.