The Lloyds share price has been flirting with the 50p level since the beginning of 2023 – but it is yet to break the key psychological level convincingly.
Despite higher interest rates boosting Lloyds key profitability metrics, the threat of a downturn in the UK economy capped Lloyds shares gains for most of 2022.
Having recovered from below 24p in the immediate aftermath of the pandemic, the Lloyds share price has more than doubled and handsomely rewards investors that bought Lloyds shares when everyone else was selling.
Whether Lloyds can continue past 50p will depend heavily on economic dynamics that held it below 50p for so long. Higher interest rates are now largely priced into shares with net interest margin touching 2.98% in Q3 2022. Focus will now be on the consequences of a slowing UK economy.
UK Mortgages
Upcoming banking results will be poured over for details of the strength of their mortgage business. The Lloyds business model is heavily overweight UK mortgages compared to peers and any weakness in UK housing will cause concerns for investors. For example, Barclays has a substantial investment banking arm that has propped up earning in recent years.
Lloyds is the UK’s largest provider of mortgages and the ongoing success of the UK housing market is inextricably linked to Lloyds future profits. Lloyds open mortgage book stood at £298.4bn 31st September 2022, up from £292.6bn a year prior.
Should Lloyds start to see disruption in the housing market, provisions will have to be made for possible bad debts and will weigh on profits.
Lloyds made a net provision charge of £1bn in the nine months to end of September 2022, after recording a net credit in the same period a year higher.
The extent to which impairments will accelerate or decelerate will be crucial to the short term performance of the Lloyds share price.
Higher interest rates will now largely be priced into UK banks and their net interest margins are typically in line with analyst estimates. This will exacerbate the importance of new mortgage business and provisions for bad loans.
If the Lloyds share price fails to break 50p in the current market rally, it will become a strong level of resistance in the future after failing their on numerous occasions.
Lloyds full year results for 2022 are due to be released 22nd February.