The Lloyds Banking Group (LSE:LLOY) share price is currently down 3.3% today, trading at 45p. It may be up 76% over the past year, but momentum has been stalled for several months now. For example, the share price is broadly flat over the past three months. With this in mind, I’ve been turning less bullish about the stock over the summer. Here are a few reasons why I’m scratching my head about the company at the moment.
Higher yields, higher income
One of the key ways that Lloyds makes money as a bank is via the net interest margin. This measures the difference between the rate it lends money out at versus the interest it pays on deposits. This is likely going to be in the region of 2.5% for this year, but has slowly been dropping due to low interest rates here in the UK in recent years. The interest rate cut last year also didn’t help.
In the half-year results, the drop was seen as net interest income was down £238m (4%) versus the same period last year. Due to the way banks structure the deposit and lending books, the hit from lower rates is more gradual. The main driver on this front for the Lloyds share price is future expectations of where interest rates will be.
If rates are expected to rise, this is positive for the interest margin for Lloyds. One way of looking at where the market expects rates to be in the future is by observing the yield on UK government bonds. Earlier this week, the 10-year maturity bond hit 1% for the first time since March 2020. This is a positive sign that rates could rise, but the Lloyds share price didn’t move higher.
It could be that investors are skeptical about the optimism shown from these yields. It also could be that investors are more focused on the short term. Either way, the company doesn’t seem to be able to take this news in a positive way at the moment.
Lloyds shares as a barometer
The Lloyds share price is typically seen as a barometer for the state of the UK economy. I’ve spoken about this before. The fact that the client base is mostly UK, along with the large retail presence, makes the company reliant on the UK economy in general. As a result, when the country is doing well, Lloyds tends to outperform other stocks within financial services.
Earlier this week, we had data out for the GDP growth in the UK for Q2. It beat expectations, showing year-on-year growth of 5.5%. This is a great data release and one that impressed me. However, the Lloyds share price didn’t spike up.
This could be because the data reflects events in the past. The share price may already reflect this information, with investors looking to the future.
Ultimately, both the higher yields and strong data are positive for Lloyds as a bank. Yet with the share price not moving higher, I’m cautious. For the moment, I won’t be investing until I see a catalyst that actually moves the share price higher.
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jonathansmith1 has no position in any share 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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