The Lloyds Banking Group (LSE: LLOY) share price has had an erratic start to 2023.
Still, forecasts indicate rising earnings and dividend yields over the next few years. And I rate the stock as a solid long-term buy.
But what might cause Lloyds shares to tank before the year is out? I can think of a few risks.
Banking crisis
A new banking crisis might do it. After all, the financial crash of 2007-8 is what hammered Lloyds shares in the first place.
But wait, we’ve just had one of those, sort of. It started with the collapse of Silicon Valley Bank in the US. And we needed a takeover by UBS to prevent the failure of Credit Suisse.
UK bank shares did wobble a bit. But they’d been ahead of the FTSE 100 in 2023. And the Lloyds share price still seems to be holding up reasonably well.
High inflation
I reckon Lloyds shares could take a beating if inflation climbs higher than expected for longer than expected. What, you’re telling me that’s just happened too?
Actually, yes. UK inflation in February unexpectedly hit 10.4%. It appears to be due to higher food prices, especially vegetables.
Still, so far, it doesn’t seem to have done any real damage to Lloyds shares. But the Bank of England (BoE) looks increasingly likely to hike interest rates even further.
And that’s my third thing.
Interest rates
In one way, higher interest rates are good for banks. They lift lending margins, providing a nice boost to profits.
But at the same time, high interest rates are bad news for mortgage borrowers. Lloyds is the UK’s biggest mortgage lender, and the last thing it needs is to have to make provisions for increasing bad mortgage debt.
Again though, Lloyds shares don’t appear to have suffered much damage yet. At least headlines speculating on a new interest rate hike seem to have been largely ignored by investors.
Liquidity
I think this is all pointing to one thing. And I’d say that’s the underlying financial strength of Lloyds itself, and the UK banks generally.
In 2022, Lloyds achieved a Common Equity Tier 1 (CET1) ratio of 14.1%. That’s after capital returns and pension contributions. And its comfortably ahead of its 12.5% target.
Without going into too much detail, CET1 is a measure of a bank’s capital position compared to its risk-weighted assets. It’s a key part of the BoE’s regular stress tests.
Those stress tests have become far more rigorous since the banking crisis. And Lloyds, along with the other UK banks, has come through them comfortably.
Capital
Lloyds announced its 2022 results in February. And it had sufficient spare capital to launch a share buyback of up to £2bn. That’s in addition to paying a dividend that amounted to a 5.3% yield.
That makes me believe that the Lloyds board has confidence in the bank’s financial underpinnings for 2023 and beyond.
And, so far, judging by the market’s lack of panic following the recent banking scares, investors don’t seem too worried either. I’m holding.
