Lloyds Bank (LON: LLOY) share price had a difficult year in 2022 as concerns about the UK economy continued. The stock dropped by about 8% and struggled to retest its highest level during the year. Nonetheless, the company outperformed other banks as the closely watched KBE ETF plunged by over 20%. Goldman Sachs, Morgan Stanley, and Bank of America shares declined by more than 20% in 2022.
UK recession fears
Lloyds share price outperformed the broader banking sector because of its reliance on interest income. Unlike banks like Barclays and Morgan Stanley, Lloyds does not have a major exposure in investment banking. Investment banking had its worst year in decades as the number of deals globally declined.
This trend happened as interest rates pushed borrowing costs to the highest level in decades. Also, regulators, especially in the United States, slammed brakes on the sector. For example, the FTC sued to stop Microsoft’s acquisition of Activision Blizzard.
Therefore, to some extent, Lloyds Bank benefited from rising interest rates as the Bank of England (BoE) delivered numerous hikes, as we wrote in this report. Lloyds and other banks make more money when rates rise since the spread between what they lend and take widens.
2023 will be a mixed year for Lloyds. On the one hand, the BoE has hinted that it will maintain high-interest rates for a while in a bid to cool inflation. The official cash rate stands at 3.5%, the highest level in more than a decade.
On the other hand, high-interest rates risk plunging the UK economy into a recession, which will lead to higher defaults. Indeed, in the third quarter, the company posted a pre-tax profit of $1.74 billion. This weak performance was because it set aside 688 million pounds in bad loans provisions.
These loan provisions could increase in 2023 if the UK sinks into a recession. The question is whether interest income will help to cover bad loans.
Will Lloyds share price rise in 2023?
Despite its outperformance in 2022, Lloyds has been a perennial underperformer as the UK lost its place in global finance. The stock is currently sharply lower than its all-time high of 546p, which it reached in 1998.
Lloyds has also underperformed following the government bailout after the 2008/9 Global Financial Crisis. It remains about 86% below the highest level in 2008.
A look at its business shows no major catalyst for 2023. Besides, its exposure in the housing sector may come back to haunt it as prices slow. Therefore, there is a likelihood that the stock will remain under pressure in 2023. The key support and resistance levels to watch in 2023 will be at 38.2p and 56p, which were the lowest and highest points in 2022.
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