Lloyds (LSE:LLOY) shares have been caught up in the market volatility of 2022. The stock is down 11% over the past three months, and 6% over the past year.
It’s currently trading for 44p. That’s at the lower end of its yearly range.
Near-term prospects are mixed for the lender. On the one hand, we’ve got higher interest rates, which means bigger margins, as well as record property prices.
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On the other hand, we’ve got slowing growth in the housing market, a cost-of-living crisis, negative economic forecasts and uncertainty around mortgage demand.
Despite this near-term uncertainty, I’d buy more Lloyds stock at 44p. Here’s why!
Short-term pain is overdone
I definitely think there will be some issues for the bank this year. Lloyds is heavily focused on the property sector. In fact, 71% of its loans are mortgages.
But if demand for mortgages falls amid higher interest rates and slowing house price growth, it would disproportionately impact Lloyds more than its peers.
Analysts aren’t sure where mortgage volumes will go next. In Q1, residential mortgage loans were 4.4% higher than a year earlier. But rate rises have continued into Q2, and more are expected through Q3.
However, higher rates work both ways for banks. Firstly, Lloyds can receive larger margins on the money it lends to customers. But it will also receive more interest on the money it leaves with the Bank of England.
So, while there will be some short-term issues, I think there are factors that will offset this.
Long-term prospects
In the long run, I’m much more confident about Lloyds’ prospects.
I actually think the firm’s weighting towards property is beneficial over the long term. The UK has an acute shortage of housing, which successive governments have not addressed.
So, I foresee demand for mortgages being stronger after this period of economic uncertainty.
I also like Lloyds’ move into the rental market. Through the brand Citra Living, the bank is looking to buy a reported 50,000 homes over the next decade.
A number of these homes will be bought through a partnership with Barratt Developments. I’m pretty sure Lloyds will be getting a good deal on these properties.
The move into rentals should also improve margins. Typically rental yields in the UK (apart from London) come in around 5%. While there will be plenty of administrative costs, 5% is considerably greater than the margins on mortgages.
Attractive valuation
Lloyds currently has a price-to-earnings (P/E) ratio of just 5.8. That looks particularly cheap, and it comes off the back of stellar 2021 for the bank. Lloyds actually appears cheaper than a number of its peers by the P/E metric, with the exception of Barclays. Although this probably reflects the lender’s lack of diversification.
The bank is also offering an attractive 4.5% dividend yield. It’s not inflation beating but it’s sustainable and will help my portfolio grow.
