The Lloyds Banking Group (LSE:LLOY) share price fell 3.8% yesterday, despite the company reporting a jump in earnings. That takes the total decline in the stock to 5.5% over the last month.
So with the business making more money and the shares costing less, is this a buying opportunity? Or is there a reason that investors should tread carefully around this one?
Earnings
Lloyds fared well in 2022, which had a lot to do with interest rates rising. But the bank warned at the start of the year that if rates increased too much, this could cause problems with loans turning bad.
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To a decent extent, yesterday’s report was largely the same. The company continued to produce strong earnings, while issuing cautious guidance for the future.
The company pulled in £4.8bn in revenues — a 16% increase compared to the first three months of 2022. Earnings were up 43%, reaching £1.6bn.
This was mostly due to higher interest rates. Net interest income (the difference between the amount Lloyds receives from borrowers and the amount it pays depositors) increased by 20%.
Despite this, management suggested that net interest margins would likely be above 3.05% for the rest of the year. With margins at 3.22% during the first quarter, this represents the possibility of a decline in profitability.
Rising interest rates present a risk of a sort, in that they increase the chances of borrowers defaulting on their loans. But the bank came through the first quarter fairly well, with less set aside for loan defaults than the previous year.
Overall, I think there’s plenty for Lloyds shareholders to feel positive about. So why is the stock falling, and is this a buying opportunity for investors looking for a bargain?
A stock to buy?
It probably hasn’t escaped the attention of most investors that there’s a lot of uncertainty in the banking sector at the moment. A series of bank failures and seizures in Europe and the US have sparked fear among investors.
But the stress in the banking system hasn’t been uniformly distributed. JP Morgan Chase and HSBC have taken the opportunity to acquire smaller banks under pressure in what look to me like really attractive investments.
In other words, I think there’s opportunity as well as risk. And the question for investors is whether Lloyds is likely to be a beneficiary of the crisis, a casualty, or neither.
As far as I can tell, there’s little reason to think that Lloyds is likely to be a casualty. By itself that isn’t a decisive consideration — there was little sign that First Republic Bank was going to be in trouble before it was too late.
But I think this could be an attractive opportunity to invest in Lloyds shares. The outlook for the business seems positive, even if rising interest rates might not continue to boost earnings in the same way they have recently.
The biggest risk to me looks like the possibility of loan defaults going forward. But if I had cash to invest today, I’d be looking seriously at the stock as an opportunity to be greedy while others are fearful.
