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Lloyds (LSE:LLOY) shares are facing sharp declines as the war in the Middle East escalates. They fell back below the key 100p per share mark, and – at 94.3p – are down 5% since January 1.
After last year’s impressive gains, do City analysts think the party is over for Lloyds and its share price? The short answer seems to be an emphatic no.
Eighteen vendors currently have ratings on FTSE 100 the bank. The average 12-month price forecast within this group is 117.5p, up 25% from today. One analyst thinks it will reach 131p by this time next year, up 39%.
But with economic uncertainty and inflation on the rise, how true are these bullish predictions?
What are the risks?
Lloyds is not the only share to lag as oil prices rise. Global stock markets are in full retreat as rising energy prices add to inflationary pressures, reducing the likelihood that central banks will cut interest rates.
Analyst Matthew Ryan of Ebury says another cut in the Bank of England rate “they are not on the table yet“. The multi-year rate cut of 3.5% looked set as recently as March 1, mind you. Some analysts believe that a rate hike is possible even if oil – which just rose at the fastest pace in six years on Monday (March 9) – continues to rise.
But aren’t high interest rates bad for banks, you ask? And if so, why did Lloyds’ share price fall? It is true that higher central bank rates boost retail banks by raising their net interest margins (NIMs). This key profitability metric measures the difference in interest they offer on savings compared to what they charge borrowers.
The problem is that interest rate movements are complex. Although they increase margins, higher interest rates can also increase economic growth, hurt income growth and increase corruption. In addition, Lloyds is highly exposed to the UK housing sector, and has an almost 20% share of the mortgage market. It is therefore particularly vulnerable.
What about moderation?
In this context, I believe that Lloyds shares may struggle to deliver the dramatic gains predicted by analysts. But that’s not all – today it remains the most expensive bank in London, which could limit new rate hikes. That rating could lead to even more downside than the broader sector if market confidence continues to wane.
Today the bank trades at a price-to-book (P/B) ratio of 1.3. That’s more Barclays0.9 again NatWestin 1.2. It is also above Lloyds’ long-term average of 0.9.
A swift resolution – which humanitarian reasons mean we all hope for – to the Iran conflict could help Lloyds’ share price rise again. But with the bank facing other risks, such as rising fines for misconduct in the provision of car finance and increasing competitive pressures, I am not sure it can continue to rise.
Lloyds shares may be worth considering for young investors. But I think I found better stocks to buy on the dip today.
