Lloyds (LSE:LLOY) shares have been relatively stable in recent times compared to the rest of the stock market. While I don’t hold this company as part of my portfolio, rising interest rates appear to make banking stocks more attractive. So, should I load up while the shares are still under 50p? Let’s take a closer look.
Interest rates are rising
Over the past year, the share price has fallen just 5%. In the last month, it’s up 5%. At the time of writing, the shares are trading at just under 45p.
There was great intrigue around the world as the US Federal Reserve met to discuss interest rates last week. In the end, it announced a 0.75% rise.
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The Bank of England decided on how much to raise rates in the UK on Thursday. And just as assumed, they jumped from 1.25% to 1.75%.
Interest rates essentially determine how much a bank like Lloyds can charge for its borrowing services, and how much it will pay those who deposit cash. Higher rates are generally good news for the banking sector.
For the six months to 30 June, the firm reported that net income had increased by 65% year on year to £7.2bn. It also lifted annual guidance and stated that this was mainly down to higher rates.
Indeed, Bank of America recently increased its price target for Lloyds shares from 57p to 60p.
Risks, but strong results
However, there’s the possibility that higher interest rates will simply make life harder for consumers who are already finding it difficult to fill their cars and shopping trolleys. It could, therefore, deter potential customers.
Another risk is that current borrowers may be unable to keep up with payments. Bad debts may end up eating into its future balance sheet. This has been something that the business has cited as a threat in recent months.
Nevertheless, a look into the company’s financial results reveals solid foundations. It appears to be quite resilient, recovering immediately from the pandemic. Between 2019 and 2020, pre-tax profit slumped from £4.4bn to £1.2bn, but this rebounded to £6.9bn in 2021.
In addition, the FTSE 100 firm has quite appealing earnings growth. Between 2017 and 2021, earnings per share (EPS) grew from 4.4p to 7.5p. By my calculations, this results in a compound annual EPS growth rate of 11.3%. This is both strong and consistent.
Overall, Lloyds is a solid firm that’s currently benefiting from the broader economic climate. As interest rates continue to rise, I think that the company may keep on reporting higher profits. To that end, I’ll add Lloyds to my portfolio while the share price is still lower than 50p.
