Lloyds shares: the best FTSE bank stock to buy

Bank stocks usually do well when interest rates are high. As such, Lloyds Shares (LSE:LLOY) could outperform the industry and the market this year. I will start the position because of the potential increase of up to 60% of the current share price.

An interesting way to earn money

Lloyds earns most of its income from the difference it receives from deposits and interest payments to customers (net interest income). It is also the largest provider of mortgages in the country. Thus, it benefited greatly from last year’s interest rate hike. With inflation still at double digits, further increases are anticipated from the Bank of England this year. This will expand the company’s net interest margin.

However, rate hikes are a double-edged sword. This is because delinquencies may increase as more customers default on their loans, thus negatively impacting the bank’s earnings. But because of Lloyds’ large asset class, it was able to protect its bottom line from falling.

The house is worried

But the million pound question is: how long can it protect the bottom line from further defaults? The housing association has predicted house prices will fall by as much as a second this year, which is not in line with the Black Horse bank’s top line.

However, the latest housing data gives investors hope. This is because there is some discontinuity in where house prices will go. Move right‘s January data shows price growth, while Nationwide and Halifax numbers have not yet for other countries. Either way, it is also positive to see mortgage rates continue to fall, which will allow the ability to hold.

On the other hand, there is fear in the commercial real estate (CRE) market as well. Latest news from Direct Line highlighted a 15% drop in CRE, which could have hit UK banks. That said, Lloyds only has a small exposure to the sector (2.5%). Of these, more than 80% of loans are in stage 1, where the credit risk is immaterial. In addition, the bank’s CRE exposure is also covered by profits and customer guarantees, which should allay concerns in the region.

Banking on success

The most profitable reason to start a position with Lloyds is to get support from many institutions. That’s what he likes UBS, Jefferies, Germanand JP Morgan all have a ‘buy’ rating on the firm. And despite the ‘continuing’ ratings from Barclays and Berenberg, it is worth noting that all target prices are above the current stock price.

No wonder why. At FTSE 100 stalwart has been very favorable price times now with some tailwinds to move it higher.

What stands out to me the most however, is that Jefferies shows a 50% rise for Lloyds shares from the current level. The US bank is the UK’s top street bank, saying rising net interest margins, with the recession having priced in the stock.

So, although I wasn’t a fan of Lloyds shares before due to their cyclical nature, these factors convinced me to change my mind. It seems like there is less risk than there is potential upside, so I would buy the stock.