One of the positives to hold Lloyds Banking Group (LSE: LLOY) shares are that interest rates have risen.
And that suits Lloyds because it depends on the spread between interest rates for much of its earnings. Indeed, the spread is the difference between the interest earned on the loan of money and the interest paid on customer deposits.
But profiting from interest rate spreads tends to be easier when base rates are high. So the previous ultra-low interest rate environment made it harder for banks like Lloyds to get a good crust.
Potential headwind
However, higher interest rates alone do not necessarily make Lloyds shares a good investment for 2023. One problem is that interest rates could be stable or even lower. Most commentators now expect the inflation rate to decline during 2023. And if inflation cools, there is likely no reason for central banks to raise key interest rates.
And this could be one of the reasons why the Lloyds share price does not make positive progress until 2022. All shares look ahead. So, although interest rates appear to be rising now, Lloyds shares may be moving forward in anticipation of a less favorable interest rate environment ahead.
But there is another potential difficulty for Lloyds. And this is the possibility that the UK faces a slowdown in economic activity. The bank’s business tends to flourish when customers are good with money. So, today’s muted stock price action may be looking forward to tougher times ahead.
But these things are difficult to measure. After all, Lloyds stock is not Lloyds business on the ground. And the stock will be hoping and trying to guess what will happen beyond the immediate challenges in the economy.
Front stockholder dividends
Indeed, the current cycle in the banking sector makes it difficult to invest in Lloyds shares with the certainty of a positive return. And the company’s multi-year record for earnings, cash flow and shareholder dividends speaks volumes about past challenges in the business.
One of the unpredictable results is the company’s perennial valuation. And I don’t expect a re-rating anytime soon, or now. So, to me, the many variables involved in any business analysis make the stock dangerous. And I know many investors have been frustrated by Lloyds over the past few years.
However, changes in business and stock fortunes have provided some upside opportunities that may be profitable for some. However, there are also many downsides. However, City analysts are predicting a double percentage increase in shareholder dividends going forward. And the yield is running more than 5%. That factor is appealing to me.
Lloyds can gain operational and share price momentum from now. However, on balance, I put it in the ‘very difficult’ pile. And I would not choose it as a long-term investment that can last for 2023 and beyond.
