The stock market crisis caused by Covid-19 took a toll on the Lloyds Bank (LSE: LLOY) share price. Before the pandemic, the shares were trading for just over 60p. To see them go below 30p at their lowest moment was quite a shock. However, they’ve gained 55% in the last year, compared to 13% for the rebounding FTSE 100. I believe this is only the beginning, and I’ll explain why.
Banking and interest rates
Banking underpins the whole economy and lending is a big part of that economy. This means banks are often the first to suffer when commerce is slow. Between Covid-19 and Brexit, it’s hard to imagine a worse time for UK businesses and, therefore, banks like Lloyds. This is why the share price fell so much at the start of the pandemic. And has stayed low for so long.
Lloyds has taken a lot of measures to recover, especially in terms of cost-cutting and concentration on lower-risk businesses. However, regardless of how tight the bank has grown, the UK base lending rate is still just 2.5%. There isn’t much room for earnings there.
But in November 2021, the Consumer Price Index recorded a general price increase of 5.1%. A whole host of factors are driving price inflation, but the best way for the Bank of England to curtail it is by raising interest rates. Higher rates mean larger profits for lenders.
A stronger economy
Back in November, UK economic production finally topped pre-pandemic levels. Assuming no new Covid variants cause significant disruptions, the economy should be returning to more conventional patterns before long. This includes achieving long-term economic growth, returning to typical inflation levels, and maintaining appropriate interest rates.
Lloyds is already the UK’s largest mortgage lender. I believe Lloyds’ income will improve if loan volumes increase and higher base rates create better margin possibilities.
Then there’s the matter of dividends. On a pure share price basis, Lloyds may seem unimpressive, but as someone interested in passive income, the company’s dividends do make it an attractive option for me.
Dividends were temporarily halted in response to the pandemic, but have already been reinstated. They’re quite low for now, (2.35% at the time of writing) but improving, and I don’t believe it’ll be long before they reach more appealing levels.
Lloyds share price value
What about the value of Lloyds share price? The bank recorded earnings of 5.1p per share at the midway point. If it happens again in the second half, the price-to-earnings ratio will only be 5.5. That is far too low, in my opinion. However, doubling the share price would bring it to 11, which I believe is a bit ambitious at the moment.
Even if interest rates do rise, they might stay historically low for a few more years. There’s still a risk of a severe downside here.
Overall, I don’t think Lloyds’ stock will double this year. But a repeat of last year’s more than 40% rise would still be astonishing. That’s why I’ll be adding it to my portfolio.
Should you invest £1,000 in Lloyds right now?
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James Reynolds 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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