At last, my Lloyds shares are up. But will it last?

It is looking up for the shareholders Lloyds Banking Group (LSE: LLOY) this year. Since the end of 2022, Lloyds shares have risen by more than six (+17.3%). But after a strong start to 2023, will bad news drag down prices?

Lloyds shares are gaining momentum

Currently, Lloyds shares have an upward momentum. The share price is at 53.29p, valuing the Black Horse bank at £35.9bn. Here’s how the stock performed over various periods:

Lloyds shares have gained over a period ranging from five days to five years. They have shown tremendous strength over the past six months, rising nearly 18%. However, they are still down almost five times in five years.

After Russia invaded Ukraine in late February, the stock market collapsed. The lowest value of Lloyds Corporation in March 2022 is 38.12 US Dollars. It has come a long way since, hovering slightly over two-fifths (+40.2%) above the bottom.

Also, the stock is very close to its 52-week high of 53.96p, hit on February 11, 2022. So far, so good. But could it spiral south again?

Lloyds looks cheap

I will quickly run through the basics of Lloyds shares. Currently, the stock trades at a price-to-earnings ratio of 8.8 and yields 11.3%. For the wider FTSE 100 index, the figures were 14 and 7.1% respectively.

In other words, Lloyds shares are ‘underpriced’ compared to the wider market. Then again, they’ve done it well for years.

As for the dividend yield, Lloyds offers a cash yield of 4% per annum, above Footsie’s 3.5% payout. But the bank’s payout has been secured 2.8 times by earnings – a margin of safety more than twice the FTSE 100’s dividend cap.

British banks face strong headwinds

In my mind, a UK economic recession is almost inevitable. Indeed, the International Monetary Fund has warned that we will be the worst performing major economy by 2023. Rising inflation (rising consumer prices), sky-high energy bills, and rising interest rates will hit the UK’s disposable income.

With consumers squeezed on every front, our economy is most likely to see weak or negative growth in 2023. It’s not good news for the biggest banks in Britain, including Lloyds. Thus, I expect bad loans and loan losses to increase this year, counting the bank’s earnings.

Then again, a rise in interest rates is a big boost for banks, as it allows lenders to increase their net interest income by expanding their net interest margins. This will generate billions of pounds of additional income for Lloyds and its peers this year.

In summary, I feel that Lloyds shares have come a long way in the short term. Hence, we may see some reversal or retrenchment coming. And while I’m positive about the bank’s long-term prospects, I’m wary of the damage it could do to earnings this year.

Finally, if Lloyds fails to raise its well-covered dividend (or even cut it), I would expect some price weakness for the stock. Therefore, as we already have Lloyds shares in our family portfolio, I would not buy any more now. But if the price drops again, I may change my mind!