Lloyds (LON:LLOY) stock was on a roll at the start of the year, gaining 15%. However, the recent banking crisis has seen its shares drop substantially. So, here’s why I think Lloyds shares are worth a buy today.
UK banks are set to report their Q1 results next week. As such, there’ll be plenty of interest in Lloyds shares in the coming days. All eyes will be on its competitors’ figures, especially after the recent banking crisis. Investors alike will be curious to see the state of deposit flows, as customers are expected to have floated their deposits into safer, more established names.
However, I’m expecting any inflows to be temporary given the competition from smaller banks and money market funds that are offering higher rates. This is a trend that was acknowledged by US banks such as JP Morgan, Citi, and Wells Fargo. In fact, Tesco Bank reported a 3.8% increase in deposits when it disclosed its results a fortnight ago, which could be a bellwether for things to come.
Therefore, most of the focus should be on whether banks can continue expanding their net interest income (NII), as well as net interest margins (NIM) in the face of increasing deposits outflows. More importantly, investors should pay close attention to the amount of provisions being set aside for credit losses, as higher impairments could see profits shrinking.
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Risky developments for Lloyds shares?
Lloyds’ short-term earnings potential could also face a number of stumbling blocks. Regulators are now looking to potentially penalise big banks for their slow pass through of higher interest rates to customers. This is part of the reason why Lloyds and its rivals have enjoyed widening NIM over the past year.
Additionally, the lender faces the danger of sticky inflation. A higher bank rate could push the group out of the ‘goldilocks zone’ — where interest rates are high enough to generate meaningful profits while impairment charges remain relatively low. This may then result in Lloyds having to put more provisions aside to cover bad debt.
Nonetheless, analysts seem to be pushing those fears aside as they predict a peak in impairment charges in Q4, spelling good news for Lloyds shares. They’re also expecting higher profits in Q1 despite lower NIM, on the back of several big US lenders reporting better-than-expected profits.
I still anticipate profits to rise this year as impairments start to fall. Money market funds and smaller banks may offer higher deposit rates, but the brand power associated with Lloyds shouldn’t be discounted either. Deposit outflows may tick up slightly in Q1, but I expect them to stabilise going into H2 as higher interest rates flow through to customers’ deposits.
More lucratively, Lloyds shares are currently trading on relatively cheap multiples, and its strong capital and liquidity should shield it from an economic downturn. With profits forecast to increase, so should dividends and share buybacks, which will improve shareholder value. Pair that with a c.39% upside and I see Lloyds shares as great buys.
Please note: Share tips are not personal recommendations or advice and should never be treated as such.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.