Are Lloyds shares a good buy?

The Lloyds share price are is up 4% to 49.55p so far in 2022 having enjoyed a higher interest rate environment, but also facing potential headwinds from a cost of living crisis.

Lloyds shares (LON:LLOY) have had a volatile 2022 so far with shares trading in a range from intraday highs of ~56p to 38p.

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This has been the result of expectations around interest rates, actual interest rate changes, and the tragedy unfolding in Ukraine.

Nonetheless, Lloyds posted a very respectable set of results for 2021 which showed the bank was benefitting from a growing mortgage business and were enjoying a higher interest rate environment.

In the latest financials, the banking group made a comeback with underlying profits of £8bn in 2021, compared to £2bn.

Lloyds enjoyed a £1.2bn reversal from unnecessary impairment charges provisioned to mitigate default risks on loans because of the pandemic. This was a significant driver of Lloyd’s higher profitability.

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In addition, Net Interest Margin rose to 2.54%, up from 2.52% in 2020. This may not sound a great deal, but this 2 basis point increase will help Lloyds bottomline.

Earlier this month, the Bank of England further increased the rates by 0.25% to 0.75%. This means Lloyds are likely to see additional growth to their Net Interest Margin in 2022.

Early this year, Sophie Lund-Yates, Equity Analyst, Hargreaves Lansdown said, “Lloyds has the UK’s biggest branch network, meaning it’s a bread-and-butter current account and lending house.”

“That makes recent interest rate hikes especially welcome, as does the better-than-expected macroeconomic backdrop in the wake of Covid.”

Lloyds was one of the first to increase its mortgage rates following the interest rate hike.

After years of recovery from the financial crisis, Lloyd’s investors will be pleased the bank has started to place more emphasis on a diversified source of income with its wealth management and its real estate venture, Citra Living.

Lloyds Valuation

With a Lloyds share price at 49p, the banking group has a market cap of £34bn.

The company’s forward P/E ratio is 8x and in line with peers in the industry, meaning it is difficult to make argument for multiple expansion in line with peers. Rather, one would expect earnings growth across the sector to ‘lift all boats’.

Lloyds real attraction comes from their dividend and the ability to increase this dividend in the future.

Lloyds has a dividend cover of 3.9x and a yield of 4% highlighting the company’s strong financial position which may lead to a rise in future dividends.

Lund-Yates highlighted the potential for further returns to shareholders through dividends, or even a buybacks:

“It’s [Lloyds] sitting on an unimaginably big pile of excess capital. The top slice of which is coming back to shareholders via buybacks.”

This creates a situation where investors should look to the potential for higher Lloyds dividends as the main driver of Lloyds share price in 2022.

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