Why high oil prices could be good news for Lloyds shares

Over the past month, the Lloyds Banking Group (LSE:LLOY) share price has fallen by 13%. Even though this isn’t a great short-term move, I believe it speaks more to general market sentiment over issues with the company. In fact, concerns about sustained high oil prices and inflation could help Lloyds’ shares. But how?

Banking operations

Let’s start by understanding where the bulk of Lloyds’ revenue comes from. For the 2025 financial year, net interest income was £13.63bn of the total group revenue of £18.3bn. This net interest income refers to the difference between the rate it charges on loans and the rate it pays on deposits. This margin grows when the base rate is higher.

If oil prices stay high in the coming months, it could cause inflation to significantly move higher, as energy is a key part of what goes into the pricing basket. As a result, it could prompt the Bank of England’s central bankers to raise interest rates. This would be done to try and act as a precautionary measure against further higher inflation.

If this does happen, it could help Lloyds increase the net interest margin. As a result, revenue later this year (and profits) could rise due to this margin increase. If it does increase the earnings per share, I’d expect the FTSE 100 stock to rise in line with the change.

Different impacts

Of course, higher inflation and rates wouldn’t help some other divisions at the bank. For example, mortgage rates are already increasing. If this continues, it could put off potential homebuyers, reducing Lloyds’ revenue from this area. Higher loan costs could cause some to default.

Even though these are risks going forward, I believe the benefit from net interest income would outweigh the damages from these other areas. The annual report showed deposits rose by 3%, with loans up 5%. This shows continued demand, which would increase net interest revenue if the trend continues this year.

Growth potential ahead

Aside from interest rate movements, the other factor I’m watching for Lloyds shares is the motor finance issue. Lloyds has already taken an additional £800m provision linked to the FCA’s proposed redress scheme, and the final outcome could still move the number around. If the eventual hit is lower than feared, the shares could rise. If it is worse, that’s an obvious risk.

Ultimately, that’s something no one can accurately assess right now, but it could be a big factor in the performance for the stock in the near future.

Lloyds’ stock is up 27% over the past year. When I weigh everything up, I think there’s still good potential for the share price to outperform this year, especially if interest rates increase. As a result, I think it’s a stock for investors to consider.

The post Why high oil prices could be good news for Lloyds shares appeared first on The Motley Fool UK.

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Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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