Why the Lloyds share price rose 7% in October

Lloyds Banking Group (LSE: LLOY) has had a good time in 2021. In October, the Lloyds share price rose by 7.8%, to close above 50p. And as I write on 1 November, we’re looking at an extra 1.8% on top of that.

At the time of writing, Lloyds shares are up 83% over the past 12 months. That’s slightly ahead of NatWest Group, but a little behind Barclays. Lloyds investors are still down 8% over the past five years, though. But as a shareholder, my optimism is definitely returning.

What’s been driving Lloyds shares, along with the rest of the banking sector, during the month? It looks like it’s mainly down to two things. One is bank reporting season, with all three banks bringing us third-quarter updates.

Bumper Q3 profit

Lloyds’ Q3 figures, on 28 October, beat analysts’ expectations. The bank posted a pre-tax profit of £2bn in the third quarter, and £5.9bn for the nine months to 30 September. The underlying figures looked even better, with pre-tax profit of £2.2bn for the quarter, and £6.3bn for the full nine months.

The open mortgage book grew by £2.7bn in Q3, and by £15.3bn since the start of the year. On a note of caution, though, we haven’t yet seen how the ending of the stamp duty holiday will affect the market. Or the reduction in help-to-buy reservations seen by the major housebuilders.

The upbeat update came a week after Barclays released a similarly buoyant set of Q3 figures. And a day after Lloyds’ figures, NatWest came up with a crowd-pleaser of its own. All in all, it was a comforting month for UK bank shareholders.

Economic developments

We’d usually need more than one decent quarter to send the Lloyds share price heading upwards. And that brings me to what I see as the other main driver.

On the day of the budget last week, we heard that economic growth is looking stronger than previously expected. The Office for Budget Responsibility (OBR) now expects the UK economy to grow by 6% in 2022. At the same time, the OBR reckons inflation is likely to hit 4% over the next year.

Stronger growth and higher inflation should, sooner or later, lead to interest rate hikes by the Bank of England. And a growing number of observers are hinting at this happening sooner rather than later. That would help the banks, which struggle to make money by lending while rates are super-low.

Lloyds share price risks?

But speaking as a long-suffering Lloyds shareholder, let me don my hat of perpetual pessimism and think about what could go wrong.

See all those share price peaks for other companies that climbed in the early part of 2021? You know, like the big spike for International Consolidated Airlines in March. There’s a whole bunch of others too. And most of them collapsed again.

I fear the current banking bullishness might be waiting to go the same way. We do still face Covid-19 dangers, and that economic outlook is seriously uncertain.

But I will stubbornly ignore the short-term outlook, and with my long-term view, I’m holding. A month from now, where will the Lloyds share price have gone in November? I can barely wait to find out.

Alan Oscroft owns shares of Lloyds Banking Group. The Motley Fool UK has recommended Barclays and 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.