The Lloyds (LSE: LLOY) share price is one of the most watched in FTSE 100. With £33 billion market capitalizationLloyds is also one of the largest financial institutions in the UK.

There’s been one big reason in particular that we’ve had our eye on the banking giant in recent days: interest rate cuts.

Interest rates falling

All eyes turned to the Bank of England yesterday (7 November) as the UK central bank cut interest rates by a further 25 basis points to 4.75%.

This is the second cut since the recent highs of 5.25%, which could be welcome news for those with mortgages. However, the central bank has signaled that fewer cuts are ahead as inflationary pressures persist.

Interest rates have an indirect impact on many parts of the economy. For banks, however, they can have a much more direct impact.

Net interest margins

One of the key metrics that banks are judged on is the net interest margin (NIM). It measures the difference between interest income earned on lending activities (such as mortgages) and interest paid on its capital base, such as deposits and loans.

It is essentially a measure of profitability. The higher a bank’s NIM, the higher its efficiency in generating income from its funds.

Following the price

Falling interest rates can compress a bank’s NIM because interest earned on loans tends to fall faster than the rates it pays depositors. That means I’m keeping a close eye on the Lloyds share price after yesterday’s BoE decision.

The bank’s shares closed broadly at 54.5p, although many investors anticipated a rate cut ahead of time. This means the Lloyds share price has now gained 13.5% this year compared to 5.4% for the Footsie.

Despite beating profit estimates for the quarter ending 30 September 2024, Lloyds’ NIM narrowed from 3.08% to 2.95%. Rival NatWest reported a 13 basis point increase in NIM to 2.18% for the same period.

Interesting, HSBC cited higher interest expense on its liabilities as a key factor behind its 24 basis point decline in NIM to 1.46% in the third quarter.

would i buy

All of this interest rate action makes for interesting viewing. The key question for me is whether or not there is a buying opportunity in UK banks. After all, Lloyds has a reputation for stability and paying a solid dividend.

Lloyds’ share price is near a six-month low with a the price-book ratio of 0.75. This means that investors buying today would pay less than the book value of the bank’s assets.

This might suggest that it is undervalued. But I think it could also mean investors are wary of weaker profitability or bad loan losses.

I am not ready to buy at the current price. I think there may be more pain for the big banks in terms of their loan books and the competition is fierce. With interest rates falling, we could see further pressure on deposit rates as banks scramble to keep depositors from moving to better deals elsewhere.