Lloyds (LSE:LLOY) shares haven’t really moved upwards in recent months, only pushing above 50p on a couple of occasions. There has been some volatility, but this has taken place despite one giant tailwind for banks.
So let’s take a closer look at this FTSE 100 stalwart’s fortunes and explore why I think it’s a top buy for my portfolio!
10-year trend
If I’d have bought £1,000 of Lloyds shares 10 years ago, today I’d have £1,175 plus any dividends I would have received during that period. That’s an okay return, but clearly not great, and reflects an annualised growth rate of 1.75%.
The bank had to reinvent itself after the 2008 crash, with Sir António Horta-Osório charged by the government to simplify the bank’s operations. As one can guess by his knighthood, Horta-Osório largely achieved this.
The share price collapsed during the pandemic and the dividend payments fell. In 2018, Lloyds’ dividend per share came in at 3.21p. The following year, the interim dividend grew by around 4.7%. However, the bank did not pay a final dividend as the pandemic kicked in.
With the dividend payment still depressed on relative terms and some uncertainty surrounding the UK economy, investors haven’t rushed into Lloyds.
Things are looking up
We’ve got recession forecasts and that’s not going to be great for credit quality. But banks, including Lloyds, have already put money aside for inflation and recession-related defaults.
However, interest rates have been increasing throughout 2022, and will likely continue increasing through to 2023. Some analysts see the Bank of England base rate hitting 4% in 2023. It could even go higher if the chancellor’s mini budget push inflation up further.
As such, net interest margins (NIMs) — the difference between savings and lending rates — are rising. In fact, Lloyds is even earning more interest on the money it leaves with the central bank.
Lloyds is a much smaller bank than it was before the 2008 crash, but one of reasons it trades at a fraction of its pre-2008 share price is interest rates. We’ve had more than a decade of near-zero interest rates. Now, finally, lending margins are increasing, substantially.
A boost from the new cabinet
It’s not going to be as big as some expected, but banks are net-gainers from the new Chancellor’s budget. Some thought that banks would be big winners. Corporation tax has been frozen at 19% (not lifted to 25%) and some analysts speculated that the bank surcharge tax would be reduced, as planned by Rishi Sunak, to 3% from 8%.
However, the latter reduction has been scrapped. So, going forward, banks will pay 19% corporation tax plus the original 8% surcharge. There’s a net gain for banks of 1% under the new chancellor. It’s small, but it’s still a win.
New projects
One project of Lloyds’ that I particularly like is its plan to enter the rental market, buying 50,000 homes over the next 10 years. I see property as a fairly safe area of the economy and this project should become a steady income generator. After all, the UK has an acute housing shortage.
For me, Lloyds is a strong buy right now. I already own Lloyds shares, but would buy more at the current price.