Lloyds (LSE: LLOY) has already clocked up an impressive performance during the first half of this year. Indeed, year to date the bank’s shares have gained 15.5%, excluding dividends, outperforming the FTSE 100 by 12% over the period.
And there are a number of catalysts on the horizon that could power Lloyds’ shares higher over the next few months to the key level of 100p per share.
Three key catalysts
There are three key catalysts that could positively affect Lloyds’ share price over the next six months.
First off, as the government sells off its remaining stake in the lender, Lloyds’ shares should head higher as liquidity increases, a large seller leaves the market and government influence over the bank dissipates.
Secondly, Lloyds’ growing earnings, strong balance sheet, dividend yield and sector-leading performance metrics, all point to the fact that Lloyds is undervalued at present levels.
For example, as I’ve covered before, a number of analysts now consider Lloyds to be one of the best run banks in Europe with a return-on-equity target of 13.5% to 15%. In comparison, many of Lloyds’ larger peers have long-term ROE targets in the low teens. But despite this sector-leading target, Lloyds is currently trading at a forward P/E of 10.4. Analysts believe the bank will offer a yield of 4.7% during 2016.
Improving economy
A third catalyst that could drive Lloyds’ shares higher is the improving UK economy and the prospect of higher interest rates as a result.
Indeed, last week Bank of England governor Mark Carney indicated that interest rates could go up at the turn of the year. And a higher interest rate would be great news for Lloyds as the bank’s net interest margin is linked to the Bank of England’s base rate.
Simply put, the net interest margin is a measure of the difference between the interest income generated by banks and the amount of interest paid out to borrowers, relative to the amount of their interest-earning assets. As a result, the wider the net interest margin, the more interest income that’s generated by banks.
With interest rates set to head higher, Lloyds’ net interest margin will grow, which will, in turn, boost the bank’s net income and City estimates for growth.
Will head higher
All of the above factors point to the fact that Lloyds’ shares are more likely to head higher than lower over the next six to twelve months.
What’s more, considering the fact that Lloyds’ closest UK peers, Barclays, HSBC and RBS trade at an average forward P/E of 12.1, Lloyds certainly deserves to trade at a higher multiple. Lloyds’ shares would be worth 99.2p if the bank’s forward P/E moved in line with its UK peers.
But don’t just take my word for it. I strongly recommend that you do your own research before making a trading decision — you may come to a different conclusion.
