Lloyds Banking Group (LSE: LLOY) has had a stellar year so far, with its share price up over 30%. However, the shares fell on Thursday after the Bank of England kept the base rate sitting at an all-time low. I think this is a temporary blip for Lloyds, and this penny stock offers me great value heading into 2022.
The stock is currently on a forward price-to-earnings ratio of just 6.3, even after this year’s gains. Not only that, but I would also pick up a forward dividend yield of 4% too.
Rising interest rates
Today was a big day for the Bank of England. That’s because the Bank’s Monetary Policy Committee – responsible for adjusting the base rate at which banks can lend to one another – announced it was keeping the base rate at an all-time low of 0.1%.
Lloyds’ shares fell over 4% after the Bank of England announced its decision…
This is because the base rate indirectly determines interest rates for all kinds of banking products, such as loans and mortgages. So a higher base rate would mean Lloyds could lend to consumers at higher rates, which would increase the company’s profitability.
But digging into the commentary, the Monetary Policy Committee signalled that interest rates would need to rise in the near future to combat rising inflation. In fact, the committee expects inflation to hit 5% by April next year!
So, if we are to see interest rates that rise soon, then Lloyds’ profitability should increase as well. I think this supports adding Lloyds to my portfolio.
Improving results
With the prospect of increasing profitability next year, what about Lloyds’ current results?
A key metric for a bank such as Lloyds is net interest income. It determines the revenue generated from its lending activity, and the higher, the better.
Net interest income has been rising for Lloyds throughout 2021. But importantly, analysts are forecasting that net interest income will increase further for Lloyds in 2022 due to the prospect of an increasing base rate.
I do have to weigh up the risks before I buy shares of Lloyds for my portfolio. Rising interest rates also increase the cost of a mortgage, which may put off potential house buyers. In doing so, Lloyds’ potential profitability may reduce from lower mortgage demand.
And not to mention the ongoing risk of Covid-19, which may hamper economic growth in 2022. Not many people want to borrow money when the economy is slumping!
On balance, though, I do like the prospects for Lloyds in 2022. Analysts are looking favourably at the penny stock, and net interest margins are forecast to rise again next year. I see today’s share price fall back to 48p a blip in what has been a stellar year for Lloyds. With a cheap valuation, a very attractive dividend yield, and the Bank of England being very likely to raise the base rate next year, I’m strongly considering buying shares now.
Dan Appleby has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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