The Lloyds share price has undergone a period of consolidation, and the charts suggest the FTSE 100 bank has built a base for a leg higher.
Lloyds are navigating a challenging economic environment. On the one hand, they are enjoying the benefits of higher interest rates on net interest margins while, on the other hand, we are starting to see housing activity slow.
Higher interest rates are proving to be a double-edged sword for Lloyds after reaping the rewards in the first half and subsequently feeling the wrath of the FCA for not passing these on to their customers.
As we move firmly into the second half and approach the 4th quarter, the question remains whether Lloyds have squeezed all they can from the current cycle. This question has led to a period of consolidation in the 42-43p region – a key level of support.
“Much will be made of Lloyds Banking Group’s 23% jump in first-half profit amid the backdrop of a cost-of-living crisis and increased pressure from regulators to share the benefits of interest rate hikes with savers,” commented Danni Hewson, head of financial analysis at AJ Bell after Lloyds reported last month.
“The net interest margin, the difference between what a bank earns in interest from loans and what it pays out, is slightly higher than analysts had forecast for the quarter, though down on where it had been in the three months previously.
“There are storm clouds gathering as the country’s biggest mortgage lender has to consider how many of its customers are likely to struggle as they face a jump from ultra-low fixed rates to the unexpected ‘new normal’.
“Lloyds boss Charlie Nunn admitted that customers were facing “significant challenges” and said that over 200,000 of its mortgage customers were among those worst affected by rising costs, a number that’s likely to be dwarfed over the coming months. To that end the bank has set aside an extra £662 million to cover expected ‘bad’ loan losses.
“For investors the bank delivered a mottled picture, with financial performance expected to slow and despite a sweetener for shareholders with a 15% jump on last year’s dividend pay-out the uncertainty has been enough to prompt a sell-off this morning.”
The clouds Hewson alludes to look now priced in, and the Lloyds share price looks set for a move to the upside. The 5.7% yield is extremely attractive and will compensate investors for any wait for capital growth.
Lloyds trades at 5.4x earnings and at just 0.6x book value. Value investors will appreciate these metrics.
A move higher could be derailed by a material deterioration in the UK economy, but we have no evidence this will occur in the immediate future. The second half will be softer than the first, and investors have quickly baked this into Lloyd’s cake.
If optimism prevails, 50p could be on the cards.