Lloyds Banking Group (LSE:LLOY) shares look dirt-cheap right now. With interest rates rising and inflation soaring also, is the Lloyds share price too cheap for me to ignore at current levels? Let’s take a look.
Lloyds share price activity
As I write, Lloyds shares are trading for 44p. In January, they were trading for 55p, meaning the stock has dropped 20% in value in approximately four months. The shares were trading at similar levels this time last year, at 43p but have meandered up and down since then.
The Lloyds share price is currently on a price-to-earnings ratio of close to 7. This is extremely cheap for one of the UK’s biggest banks. On the surface then, the shares look cheap. And it’s worth noting that the benchmark P/E ratio is 10, meaning by industry standards, the shares look cheap too.
The bull case
Lloyds shares are often viewed as a good passive income stock. At current levels, they offer a juicy dividend yield of close to 5%. This is higher than the FTSE 100 average of 3%-4%.
And the share price could be in a position to benefit from rising interest rates through its lending activities. The pressure being placed on households due to soaring inflation means demand for loans and credit products is on the rise. Consumers are attempting to navigate stormy waters by borrowing more.
Lloyds could also benefit from the increase in base rates brought in by the Bank of England (BoE) as it battles rising inflation. With interest rates up, Lloyds’ bottom line and profit levels could rise too from its various lending activities and especially its mortgage loans. This should boost performance, shareholder returns, and the share price. It’s worth noting that analysts and economists expect the BoE to continue increasing interest rates in the short-to-medium term.
Risks facing the Lloyds share price
On the minus side, I believe Lloyds shares could come under pressure for two reasons. Firstly, as much as the cost of living crisis could boost its bottom line, it could also cause problems. While increasing interest rates could benefit Lloyds for now, if the issues last longer, it could impact the bank negatively. It may find that consumers and businesses default on the money they owe. This would be bad news for Lloyds’ shares, earnings and returns.
The bank is one of the UK’s biggest mortgage lenders with close to a fifth of the total market share. So cash-strapped consumers unable to pay their mortgages could hurt it more than they’d hurt its rivals.
Is the Lloyds share price too cheap to ignore?
On balance, right now I wouldn’t buy Lloyds shares for my holdings. I can see the value in the share price currently, as well as the potential positives including a passive income stream. My issue is the macroeconomic factors at play, and more importantly, the uncertainties attached to these. I will continue to keep an eye on developments, however.