Lloyds Bank (LSE: LLOY) shares have staged a spectacular recovery recently. Since hitting 24p on 22 September, Lloyds’ share price has climbed to 36p. That represents a gain of 50% in about two months.
I already own a small parcel of Lloyds shares. Should I buy more to capitalise on this upward trend? Let’s take a look at the investment case.
Why is Lloyds’ share price rising?
There are two main reasons why Lloyds’ share price is rising right now.
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The first is that the news that an effective coronavirus vaccine has been developed has propelled UK shares higher. Lloyds is not the only UK stock that has bounced recently. Other beaten-up stocks such as Legal & General, easyJet, and ITV have also enjoyed spectacular gains. Investors clearly think a vaccine will restore normality and boost the economy.
The second is that Lloyds’ third-quarter results, posted in late October, were encouraging. Boosted by an increased demand for mortgages, Lloyds reported a pre-tax profit of £1bn for the quarter, which was much higher than the consensus forecast of £588m. Lloyds also lowered its provisions for expected bad loans. For the quarter, it only set aside a further £301m to cover expected customer loan defaults, less than half the £721m analysts had expected.
As a result of these developments, sentiments towards Lloyds shares has improved.
Why Lloyds shares could run out of steam
Lloyds still faces plenty of challenges in the near term, however.
The UK economy enjoyed a nice rebound in the third quarter, growing by a record 15.5%. Looking ahead though, the picture looks quite grim. The coronavirus pandemic is far from over. Economists predict that the UK economy will take a significant hit from the new round of lockdowns and GDP is widely expected to go into reverse again in Q4.
According to the Office for National Statistics (ONS), one in seven firms was teetering on the brink of collapse before the new lockdown in England came into force at the start of November. Within the hospitality sector, the figure was closer to one in three. With the Tier 4 lockdown now in place across the country, I think it’s likely that many small businesses won’t survive the winter. This is bad news for Lloyds.
Another issue that concerns me is that the earnings boost Lloyds has received from mortgage applications is likely to be temporary. It has benefited from the stamp duty holiday that was announced back in July. This has sent mortgage applications soaring. In Q3, the bank booked new mortgage lending of £3bn after receiving the biggest surge in quarterly applications since 2008. The stamp duty holiday is set to end at the end of March. This may result in profits falling.
Finally, there’s Brexit. According to KPMG, Brexit could cut tens of billions of pounds from economic growth next year, hampering the UK’s recovery from the coronavirus. This could hurt Lloyds’ profits, and share price.
My view now
I think Lloyds shares have the potential to keep rising. That said, it’s not a stock I’d rush out to buy today. The vaccine news is promising, but the outlook for UK banks is still rather uncertain, in my view. There are plenty of risks that could derail growth.
All things considered, I think there are better stocks to buy right now.
