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With the Lloyds share price approaching 50p, should I buy more of the stock?

British bank notes and coins
Image source: Getty Images

During trading on Friday, the Lloyds (LSE:LLOY) share price nearly climbed back over 50p. The last time it was at this level was in March 2022.

I’ve been looking at the bank’s recent financial performance to see what might happen to its share price in 2023.

Taking an interest

The key financial measure for a bank is the net interest margin. This is the difference between the interest earned on loans and the amount paid on deposits (net income), expressed as a percentage of assets.

In an environment of rising interest rates, banks generally become more profitable. The average maturity period of loans tends to be longer than that of deposits. Banks can therefore charge more to borrowers than it pays to depositors.

Also, loans are usually provided with variable interest rates whereas the amount paid on savings is often fixed. If the Bank of England increases the base rate, Lloyds will immediately increase the amount it charges for variable loans, but will leave its fixed deposit rates unchanged.

Not all good news

But, there’s a potential problem for banks if they increase interest rates. The risk of additional loan defaults also goes up.

Each reporting period, Lloyds reviews its loan book and makes an assessment as to the recoverability of the amounts lent. This provision moves from one quarter to the next. If the directors believe that more customers are likely to default, there is a requirement to include an additional impairment charge in the accounts. Conversely, if they feel that the situation is improving, and fewer borrowers are likely to miss their repayments or fail to repay their loans, then a credit is recorded.

Will the Lloyds share price continue to rise in 2023? The answer largely depends on whether the additional net income generated from its operations more than outweighs the cost of potential bad loans.

Quarterly performance

The table below summarises Lloyds’ quarterly performance since March 2021.

Performance measure

Q1 2021

Q2 2021

Q3 2021

Q4 2021

Q1 2022

Q2 2022

Q3 2022

Underlying net interest income (£m)

2,677

2,741

2,852

2,893

2,945

3,190

3,394

Banking net interest margin (%)

2.49

2.51

2.55

2.57

2.68

2.87

2.98

Impairment (charge)/credit (£m)

360

374

119

532

(177)

(200)

(668)

As expected, both income and the net interest margin are increasing.

However, the loan book assessment has moved from a net impairment credit for each of the quarters in 2021 to a charge throughout 2022.

The Bank of England is expected to continue raising interest rates during the first half of 2023.

Lloyds is a domestically focussed bank, and is often seen as a barometer for the UK economy. Although a recession is expected, most economists believe it will be relatively shallow and short-lived. I therefore expect the risk of loan defaults will not increase too dramatically. If my assessment is correct, Lloyds should be a net beneficiary from the increasing base rate.

What have I decided?

I already own shares in Lloyds.

I like the dividend yield that it currently offers of around 4.5%. But, I see the benefits of having a diversified portfolio, and I don’t want to be too heavily concentrated in one particular stock.

Otherwise, I’d be tempted to buy more shares in the UK’s largest lender.

The post With the Lloyds share price approaching 50p, should I buy more of the stock? appeared first on The Motley Fool UK.

More reading

James Beard has positions in Lloyds Banking Group Plc. The Motley Fool UK has recommended Lloyds Banking Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2023