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Lloyds (LSE:LLOY) shares are suffering an almighty drop-off as the Middle East war escalates. They’ve slumped back below the critical 100p per share marker, and — at 94.3p — are down 5% since 1 January.
After the stunning gains of the last year, do City analysts think the party is over for Lloyds and its share price? The short answer appears to be an emphatic no.
Eighteen brokers currently have ratings on the FTSE 100 bank. The average 12-month price forecast among this grouping is 117.5p, up 25% from today. One analyst thinks it’ll reach 131p by this time next year, up 39%.
But with economic and inflationary uncertainty increasing, how realistic are these bullish forecasts?
What are the risks?
Lloyds isn’t the only share on the back foot as oil prices spike. Global stock markets are in full retreat as surging energy values boost inflationary pressures, slashing the odds on central banks reducing interest rates.
Analyst Matthew Ryan of Ebury says further Bank of England rate cuts “are completely off the table for now“. A cut to new multi-year lows of 3.5% had looked nailed on as recently as 1 March, don’t forget. Some analysts believe rate hikes could even be possible if oil — which has just risen at its fastest pace for six years on Monday (9 March) — keeps climbing.
But aren’t higher interest rates good for banks, you ask? And if so, why is Lloyds’ share price plummeting? It’s true that higher central bank rates boost retail banks by lifting their net interest margins (NIMs). This key profitability metric measures the difference in interest that they offer savers versus what they charge borrowers.
The problem is that interest rate movements are complex. Though boosting margins, higher interest rates can also hammer economic growth, damaging income growth and pushing up impairments. What’s more, Lloyds is most exposed to the UK housing sector, and has a near-20% share of the mortgage market. So it’s especially vulnerable.
What about the valuation?
In this context, I believe Lloyds shares could struggle to deliver the stunning price gains analysts are predicting. But that’s not all — today it remains London’s most expensive bank, which could limit scope for fresh price increases. That valuation may even lead to it falling more sharply than the broader sector if market confidence continues to sink.
Today the bank trades on a price-to-book (P/B) ratio of 1.3. That’s above Barclays‘ 0.9 and NatWest‘s 1.2. It’s also above Lloyds’ own long-term average of 0.9.
A quick resolution — which humanitarian reasons mean we all hope for — to the conflict in Iran could help Lloyds’ share price gain momentum again. But with the bank facing other dangers too, like rising misconduct penalties for motor finance provision and growing competitive pressures, I’m not confident it can keep rising.
Lloyds shares might be worth consideration from more adventurous investors. But I think I’ve found better shares for me to buy on the dip today.
This story originally appeared on Motley Fool
