Lloyds Banking Group Share Price Set to Soar Despite Falling Interest Rates
The Lloyds Banking Group (LSE:LLOY) share price has experienced a remarkable surge of over 35% since the end of April 2024, despite a 1.3p decline in earnings per share to 6.3p in 2024. According to The Motley Fool, this impressive performance may be attributed to the 15% increase in dividend payments.
A Simple Business Model
Lloyds, like all banks, operates on a straightforward business model. The bank attracts customer deposits by paying interest on savings, which is then lent to others at a higher interest rate. The difference between the interest paid on deposits and earned on loans, expressed as a percentage of interest-bearing assets, is known as the net interest margin (NIM). As noted by The Motley Fool, monetary policy decisions by the Bank of England (BoE) significantly impact earnings, with higher interest rates typically benefiting banks.
The BoE has cut the base rate by 0.75% since its 15-year high of 5.25% in the summer of 2023, with three-quarter-point reductions in August 2024, November 2024, and February 2025, bringing the benchmark to 4.5%. With another cut expected on Thursday, 8 May, and some economists predicting three more reductions over the remainder of 2025, Lloyds’ NIM could face pressure.
A Positive Outlook
However, The Motley Fool reports that analysts expect the bank’s margin to increase over the next three years, with average forecasts of 3.02% (2025), 3.15% (2026), and 3.22% (2027). Examining Lloyds’ 2024 accounts, the bank generated net interest income of £12.28bn by charging an effective rate of 6.88% on loans and paying an average of 3.99% on savings. The Motley Fool notes that reducing both rates by one percentage point would have increased income by 1.6% to £12.48bn, highlighting that the relative value of total loans and deposits has the biggest influence on earnings.
Pros and Cons
However, The Motley Fool also reports that the sector is becoming increasingly competitive, with all major banks offering fixed-rate mortgages below 4%, which could adversely impact earnings. Furthermore, Lloyds faces an investigation into the alleged mis-selling of car finance, which may result in significant compensation payments. The bank has set aside £1.35bn as an estimate of potential costs, although one forecast suggests the final bill could be as high as £3.9bn.
Additionally, Lloyds’ finances are heavily influenced by the performance of the domestic economy, as nearly all of its earnings come from the UK. However, The Motley Fool notes that the bank has the size and balance sheet strength to cope with these challenges, with gross assets of £906.7bn, including cash of £62.7bn, as of 31 December 2024.
In conclusion, despite the expected decline in interest rates, Lloyds’ earnings – and therefore its share price – could continue to rise. As long as the bank can generate new business and grow its loan book, as analysts expect, its NIM could increase. According to The Motley Fool, long-term investors could consider taking a position in the bank.
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