Lloyds Banking Group (LSE:LLOY) is a financial services group focused on retail and commercial customers. It has branches all across the UK with a wide customer base. And yet Lloyds shares have delivered pretty underwhelming returns over the last decade.

The banking group recently achieved a 10-percentage point rise in business confidence. This is the highest the bank has ever achieved since February 2022. I believe it is a great investor booster and good news for the future of Lloyds shares. This has been a big achievement considering the rising inflation and cost of living crisis. So, is now the time to add this bank to my investment portfolio?

Key Points

• The banking group achieved a 10-percentage point rise in business confidence.
• The loan-to-deposit ratio was a healthy 96% during the second quarter of 2023.
• Analysts have a joint consensus of a moderate buy and/or hold for Lloyds shares.

What does Lloyds do?

Lloyds is a leading financial services bank based in the UK with a centuries-old history. Its customer base is around 30 million, with a supporting employee force of more than 65,000.

Lloyds shares are currently trading at 44p. With roughly 70 billion shares outstanding, the market cap of the banking group stands at £28bn.

How do the financials look?

The banking group proudly reported robust financial performance for the half year of its 2023 fiscal year ending in December. It continued to deliver on strategic ambitions and well well-positioned to deliver for all stakeholders.

Net income was reported at £9.2bn, an 11% increase from the previous year’s same period. Underlying net interest income was reported at £7.0bn, with a net interest margin of 3.18%. Looking on a quarterly basis, the net interest margin was recorded at 3.14% in the second quarter, which was down by around eight basis points versus the first.

This reduction is owed to the expected headwinds from mortgage and deposit pricing. However, it’s worth pointing out that both levels of profitability did come in higher than management was expecting.

Amongst all this, the loan-to-deposit ratio was a healthy 96%, reflecting the balance sheet stability of the banking group.

The bull case for the Lloyds share price

At a trading price of 44p, Lloyds shares are on a bearish trend after hitting a previous high price of 53.33p in February 2023.

The bank continues to proactively contact its customers to offer support due to the rising cost of living. Also, they have committed to the Government’s Mortgage Charter, and product transfers are now available six months in advance for residential mortgage customers.

I believe this is an excellent step in these difficult times to maintain and grow the customer base.

The bear case for the Lloyds share price

One of the biggest risks the banking industry comes across is the risk to earnings and capital from movements in interest rates. However, the centuries-old history of business comes in handy in difficult situations like these.

The banking group manages these risks by hedging the net liabilities, which are stable or less sensitive to movements in rates. As of 30 June 2023, the Group’s structural hedge had an approved capacity of £255bn. This figure remained stable as of 31 December 2022 at £255bn.

Lloyds Share price prediction

Analysts have a joint consensus of a moderate buy and/or hold for Lloyds shares. The price forecast for Lloyds Banking Group was set at 63p and the lowest at 44p. Compared to the current share price, this would suggest that the stock is either fairly valued or has some room to grow upward. Of course, it’s critical to remember that forecasts are rarely accurate, and it’s entirely possible that analysts have overlooked an important factor that could prevent such performance from coming to throughition.

Should I buy Lloyds shares today?

Analysts believe that Lloyds is all set to benefit from the incremental interest rate hikes. But in case of any economic rise or fall, the future cannot be predicted.

Don’t forget that while higher interest rates are good for lending margins, they also increase the odds of customers defaulting on their loans. In fact, evidence of this is already starting to materialise, with the total loan book starting to shrink while impairment charges are on the rise.

Despite all this, the banking group was able to report a higher profit than the previous half-year report, indicating strength and resilience. Therefore, I remain cautiously optimistic about the long-term potential of this enterprise, and I am considering adding it to my personal income portfolio.

Saima Naveed does not own shares in any of the companies mentioned. The Money Cog has no position in any of the companies mentioned. Views expressed on the companies and assets mentioned in this article are those of the writer and, therefore, may differ from the opinions of analysts in The Money Cog Premium services.