Lloyds shares are never absent from the blue chip spotlight, however the collective market magnifying glass has intensified this week on the release of the latest UK inflation data, which revealed the economy had hit the dreaded double-digits at 10.1% nationwide inflation.
Interest rates are currently at 1.75% and set to rise further, if the speed of UK inflation is anything to go by. While higher interest rates mean higher returns on loans for Lloyds, it also means a slowing housing market, spelling a potential stumbling block for the UK’s biggest mortgage lender.
Meanwhile, sky high inflation means Lloyds has had to set aside some finance to absorb the impact of bad debts as the cost of living bites and credit card borrowing hits surging heights.
However, Lloyds currently has a net interest margin of 2.66% and a projected net interest margin of over 2.8% in FY 2022, reflecting positive news for Lloyds share price as higher interest income bolsters the bank’s income statement.
Lloyds shares
Lloyds shares have fallen 4.5% year-to-date, highlighting a potentially attractive opportunity to snap up a household favourite share.
The banking giant offers an attractive yield of 4.4% and a strong dividend cover of 3.9, giving investors adequate confidence in Lloyds’ ability to pay out its dividend even factoring in potential market shocks.
On that point, the bank has an enviable CET1 ratio of 14.7%, signalling adequate security in case of a huge market crash.
However, Lloyds has a current PE ratio of 5.9 and a forward PE ratio of 6.4, suggesting analysts expect a drop in earnings in the coming months as the cost of living squeeze hits consumer pockets, and consequently Lloyds’ profit margins. Fewer houses bought, more loans defaulted on, and potential trouble for the company ahead.
Regardless, Lloyds shares have benefited from the bank’s strong results, alongside its generous share buyback schedule, including its £2 billion buyback launched on February 2022. Lloyds had completed £1.3 billion in share buybacks by 30 June this year.
The coming times ahead are unlikely to be comfortable for most companies going forward, and with a recession looming on the horizon, stocks big and small are set to take a hit.
Lloyds shares appear to be in a decent position to manage the market turbulence, however, and still look like a solid income choice for the close of summer.