Lloyds share price is recoiling: Is it a good investment?
- The Bank of England continued hiking interest rates on Thursday.
- Higher rates will benefit Lloyds and other UK banks.
- Lloyds published relatively weak results last week.
Lloyds (LON: LLOY) share price pulled back on Thursday as investors reflected on the latest Bank of England (BoE) rate decision. The shares dropped to a low of 41.48p, where it has been in the past few days.
Bank of England decision
Lloyds Bank is the biggest British bank that owns some of the best-known brands like Scottish Widows, Halifax, and Bank of Scotland among others. It owns 14 brands and serves more than 26 million customers.
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Lloyds share price tilted lower in the past few days as investors reflected on the latest interest rate decision by the Bank of England. In a statement, the BoE voted unanimously to hike interest rates by 0.75%, the biggest increase in 33 years.
Lloyds Bank makes more money when interest rates rise. In its earnings last week, the company said that its net interest margin rose to 2.98% in the quarter. Therefore, there is a likelihood that the company will continue seeing strong results in the coming months.
Still, the biggest challenge for Lloyds Bank is that its profits remain in trouble. The company’s pre-tax profit dropped by 26% to £1.5 billion in the quarter. These results were worse than the median estimate of £1.8 billion.
The challenge for the company is that its anticipation of rising defaults rose. In a statement, the company said that its anticipation of rising defaults rose to £668 million. Analysts were expecting its provisions to be about £285 million.
Lloyds share price has also struggled because of its exposure to the reverse repo agreements. This is a situation where banks lend cash to pension funds through their corporate treasuries and take bonds as collateral. While most banks have exposure to these items, Lloyds had the biggest exposure.
Lloyds share price forecast
The daily chart shows that the LLOY share price was little changed after the latest interest rate decision by the Bank of England. It remained at the tight range where it has been in the past few days. The shares have moved slightly below the 50-day EMA while the Relative Strength Index (RSI) remained below the neutral level.
So, is it safe to buy Lloyds shares? While Lloyds is a good bank, it has been a bad investment over the years. Most recently, it has remained between 40p and 50p for months. Therefore, I would not recommend investing in Lloyds until it makes a meaningful recovery above 60p.