The Lloyds Banking Group (LSE: LLOY) The share price is currently trading at 45p, down 3.3%. It may be 76% higher than last year, but the pace has stagnated over the past few months. For example, stock prices have flattened sharply in the last three months. With that in mind, I’ve turned less bullish about stocks over the summer. Here are a few reasons why I scratch my head about the company at the moment.
The higher the yield, the higher the income
One of the main ways to make money as Lloyds Bank is through net interest margins. It measures the difference in the rate of payment as opposed to the interest paid on the deposit. This is likely to be in the region of 2.5% for this year, but has been slowly declining here in recent years due to lower interest rates in the UK. Reducing interest rates last year did not help either.
In the half-year results, the drop was seen because net interest income decreased by 8 238m (4%) compared to the same period last year. The effect of lower rates is more gradual due to the way banks construct deposit and nd books. The main driver of this front for the Lloyds share price is the future expectation of where the interest rate will be.
If the rate is expected to rise, it is positive for Lloyds ’interest margins. One way to see where the market expects rates in the future is to monitor the yield on UK government bonds. Earlier this week, the 10-year maturity bond hit 1% for the first time since March 2020. This is a positive sign that the rate may rise, but the Lloyds share price has not risen much.
It may be that investors are skeptical about the optimism shown from this yield. It could also be that investors are more focused in the short term. Either way, at the moment the company doesn’t seem to be able to take this news in a positive way.
Lloyds shares as a barometer
The price of Lloyds shares is generally seen as a barometer for the states of the UK economy. I have said this before. The client base is mostly UK, with a large retail presence, the company is generally dependent on the UK economy. As a result, while the country is doing well, Lloyds continues to outperform other stocks in financial services.
Earlier this week, the UK had data on our GDP growth for Q2. It beat expectations, showing a 5.5% increase on a year-over-year basis. This is a great data release and it has fascinated me. However, Lloyds shares did not rise in price.
This may be because the data reflects past events. The share price may already reflect this information, investors are looking to the future.
In the end, both high yields and strong data are positive for Lloyds as a bank. Yet with the share price not rising much, I warn. For the moment, I won’t invest until I see a catalyst that actually makes the share price higher.
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jonathansmith1 has no position on any of the mentioned shares. Motley Full UK Lloyds Banking Group has recommended. Opinions expressed in the companies mentioned in this article may differ from those of the author and therefore our official recommendations in our subscription services such as Share Advisors, Hidden Winners and Pro. Here at The Motley Flower we believe that considering a variety of insights makes us a better investor.