Will the Lloyds share price recover to its pre-Covid levels in 2023?

In 48p, in Lloyds (LSE: LLOY) share price hovers below where banks were trading before the pandemic. Three years ago, shares were changing hands at above 60p.

With interest rates expected to rise this year, there is support for the bull case. However, the risks posed by a potential recession and cooling housing market conditions.

So can Lloyds shares recover to pre-Covid levels by 2023? Here I am.

Tailwinds

Currently, the Bank of England’s base rate is 3.5%. Britain’s central bank said it would keep borrowing costs low in 2023 to curb inflation. Indeed, the market expects the base rate to rise to 4.6% in July.

Black horse banks can benefit from rising interest rates because of this positive effect on the net interest margin (the difference between what they charge for loans and the amount paid to depositors).

Net interest income makes up a large portion of Lloyds’ total income as it does not have significant exposure to investment banking operations. This means that it is particularly sensitive to changes in monetary policy.

Higher interest rates are also beneficial for bank dividend payments. Currently yielding a 4.5% dividend, Lloyds shares are the cream of the crop among them. FTSE 100 banks. They should produce more than Barclays (3.6%), HSBC (3.8%), and NatWest (4.3%).

If the wider spread between lending rates and savings rates is a continuing feature in 2023, Lloyds’ profits should improve. Ultimately, this means that dividends are more sustainable. This will support analysts’ forecasts that the annual distribution will rise this year to 2.44p per share.

Headwind

Rising interest rates bring risks to Lloyds’ share price as well. The adverse impact on the mortgage market from higher borrowing costs could lead to a downturn in the property market.

Indeed, Halifax (which is part of the Lloyds banking group) has recently announced that house prices are starting to fall. They expect it to drop to 8% by 2023 as buyers and sellers remain cautious.

As the UK’s biggest mortgage lender, a downturn in the housing market could weigh on Lloyds shares. In addition, the risk of recession increases the number of bad loans on the bank’s books.

It doesn’t mean not being ready. Credit rating agency Fitch Ratings classifies Lloyds’ mortgage loans as “less risk“due asset class”conservative collateralization“.

However, it warns that consumer loans and commercial credit face higher risks even though the group “conservative underwriting standards“This mitigation is to some extent.

Can Lloyds share price recover this year?

To recover to pre-Covid levels this year, Lloyds shares would need to rise by around 25% from their current price. Because of the broad economic challenges, that seems difficult to me.

While I think investors should be more patient in waiting for the stock to rise above 60p, I believe it will come if economic conditions improve. In the meantime, market-leading dividends make it a great passive income option in my view.

I will be reinvesting the dividends I receive from shareholding into other Lloyds shares as the year progresses, allowing me to benefit from compounding returns over the long term.