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At 48p, the lloyds (LSE: LLOY) share price is anchored below where the bank was trading before the pandemic struck. Three years ago, the stock was changing hands above 60 pence.
Given that interest rates are likely to rise this year, there is support for the bullish argument. However, the risks posed by a potential recession and a cooling housing market temper this somewhat.
So can Lloyds shares recapture their pre-Covid levels in 2023? Here is my opinion.
tailwinds
Currently, the Bank of England base rate is 3.5%. Britain’s central bank has indicated it will keep borrowing costs high in 2023 to rein in runaway inflation. In fact, the market expects the base rate to shoot up to 4.6% for July.
The dark horse bank could benefit from raising interest rates because of the positive effect this has on its net interest margin (the difference between what it charges for its loans and the amount it pays out to depositors).
Net interest income accounts for the majority of Lloyds’ total income, as it does not have significant exposure to investment banking operations. This means that it is particularly sensitive to changes in monetary policy.
Higher interest rates are also beneficial for the bank’s dividend payments. Currently, with a dividend yield of 4.5%, Lloyds shares are the cream of the crop among FTSE 100 banks. They offer higher performance than barclays (3.6%), HSBC (3.8%), and NatWest (4.3%).
If wider spreads between borrowing rates and saving rates are a persistent feature in 2023, Lloyds’ profitability should improve. Ultimately, this means that the dividend becomes more sustainable. This would support analysts’ forecasts that its annual distributions will increase this year to 2.44 pence per share.
headwinds
Rising interest rates also carry risks for the Lloyds share price. Adverse impacts on the mortgage market derived from higher borrowing costs could translate into a slowdown in the real estate market.
In fact, Halifax (part of the Lloyds banking group) recently revealed that house prices are starting to fall. He expects they could drop as much as 8% in 2023 as buyers and sellers remain cautious.
As the UK’s biggest mortgage lender, a housing market downturn could weigh on Lloyds shares. Furthermore, the risk of a recession raises the specter of an increasing number of bad loans on the bank’s books.
That doesn’t mean you’re not ready. The credit rating agency Fitch Ratings classifies Lloyds mortgage loans as “Low risk” asset class due to “conservative collateralization“.
However, he cautions that consumer loans and business loans face higher risks despite the “conservative underwriting standardsmitigating this to some extent.
Will the Lloyds share price recover this year?
To recover to their pre-COVID-19 levels this year, Lloyds shares would need to rise around 25% from their current price. Given the broad economic challenges, it strikes me as a difficult question.
While I think investors will have to be a bit more patient to wait for the stock to rise above 60p, I think it will eventually come if economic conditions improve. Meanwhile, the market leading dividend makes it a great passive income pick in my opinion.
I will reinvest the dividends I receive from my shareholding in more Lloyds shares as the year progresses, allowing me to benefit from long-term compounding returns.
