The Lloyds (LSE: LLOY) share price should benefit significantly from rising interest rates. However, it does not look as if the market is factoring this into account when analysing the company and its prospects.
Lloyds share price value
At the time of writing, the bank is trading at a forward price-to-earnings (P/E) multiple of 6.4. This is based on the lender’s performance for the 2021 financial year. It is projected to earn £5.8bn for this period.
As the country’s largest mortgage lender, Lloyds has benefited significantly from elevated activity in the housing sector over the past 24 months. Unfortunately, analysts do not expect this growth to last.
The City has pencilled in a 21% decline in net profit and earnings for 2022 as the housing market cools. I expect this figure to change over the next 12 months.
The economic and interest rate environment is changing all the time, and this is something I have to factor into my calculations. Indeed, over the past 12 months, analysts have revised their earnings projections for the bank in 2022 higher by 25%.
If this trend continues, I think investor sentiment towards the Lloyds share price could improve significantly. This could drive a substantial re-rating of the stock to a higher earnings multiple as investors reconsider the bank’s outlook.
That is just what has happened over the past 12 months. The stock has jumped 53% as investors have re-evaluated the company’s prospects and the prospects for the UK economy in general.
Bumps in the road
I think it is unrealistic to expect this sort of return over the next year. Further, past performance should never be used to guide future potential.
Still, I expect big things from the company in the year ahead. The combination of higher interest rates and economic growth could provide a dual tailwind for the group. It is also investing heavily in other growth initiatives, such as build-to-rent property, wealth management and credit cards.
After the disruption of Brexit and then the pandemic, 2022 and 2023 should be the first years in a long time when the bank can really showcase its strengths.
That said, I think it would be a mistake to say that the group is entirely out of the woods. The UK economic outlook is still unpredictable. The cost of living crisis could have a knock-on effect on economic growth, which will almost certainly impact the bank’s potential. Rising costs could also nibble away at the group’s profit margins and hit its bottom line.
Moving on
These are the main challenges the corporation will face over the next 12 months. Still, for the reasons outlined above, I think the Lloyds share price could continue to rally as the lender moves on from the pandemic.
Considering this potential, and the company’s 4.2% dividend yield, I would be happy to buy the stock for my portfolio today as an income and growth investment.
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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. 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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