Late last month, Lloyds Banking Group (LSE:LLOY) shares broke above 50p for the first time since April 2023. It’s a key psychological barrier which has now been broken.
With the Lloyds share price now sitting at 52p, here’s why we could be due to head even higher over the course of the coming couple of years.
A factor helping to push growth
In March, the business released a really interesting update where it ran through one of the key areas it’s pushing right now. This is the mass affluent sector, an area defined by being filled with those with income between £75k and £250k, with a similar amount in deposits.
The bank already services clients that meet this threshold, but management’s focusing on growing this area going forward. For context, the bank is targeting £1.5bn of additional revenues per annum by 2026.
Of this, it wants 25% to come from the mass affluent segment. Given the current limited nature of this division, the growth potential being pushed here is large.
This could really help the bank grow, given the fact that a mass affluent client delivers five times the income per customer versus a mass market client.
A point aiding lower costs
Another key point I noted from the annual report was the large cost savings. For 2023, it recorded £0.7bn worth of savings, with a further £1.2bn expected for 2024.
The push towards being a more digital bank will help to delivery this. In 2023, it recorded 21.5m active digital users, up 17% from 2021. Even though research and development costs hurt in the short term, the cost efficiencies here will be significant.
Sure, it might unfortunately mean some job losses in coming years as manual tasks are cut out. Yet, ultimately, this is for the benefit of a more streamlined bank that can compete in a tough market.
How this impacts the share price
In my eyes, the growth push in the wealth management space alongside cost savings could yield rich results for investors.
At 52p, the price-to-earnings ratio is 6.81. Let’s assume that over the course of the next two years, the business is able to grow revenue by an additional £1bn. Let’s also factor in a reduction in expenses by the same amount.
If all other factors remain the same, this could help to raise the post-tax profit figure by £2bn for 2025. Using this updated earnings per share figure (10.38p), this would put the share price at 70.69p in order to have the same price-to-earnings ratio (6.81) as it has today.
Of course, my risk here is that my figures factor in a lot of assumptions. The mass affluent push might fail. Cost-cutting might be offset by higher inflation, meaning that costs rise instead of fall. In that case, 70p might be a very unrealistic target.
Yet based on the information I have at my disposal right now, I think the assumptions are fair. On that basis, I’m considering buying the stock for my portfolio and feel other investors should consider it too.
This post was originally published on Motley Fool
