The Lloyds Banking Group (LSE: LLOY) share price has been on a rollercoaster ride over the past 12 months. The UK banking share toppled to nine-year lows below 25p in September. But buying interest in the FTSE 100 bank has risen strongly since those troughs. In fact Lloyds is now trading fractionally more expensively than it was a year ago around 42p.
But can the Lloyds share price keep on soaring?
Reasons to be cheerful
Here are three reasons to be optimistic about the Lloyds share price:
#1: Turning the Covid-19 tide: Britain’s services-dependent economy meant that domestic GDP was one of the worst affected of all developing economies following the Covid-19 outbreak. But there are hopes that the UK could be well past the worst in an obvious boon to UK-focused cyclical shares like Lloyds. Indeed, the Bank of England recently predicted that the economy will bounce back strongly thanks to the successful vaccine rollout. Revenues could well be about to soar (and bad loan provisions recede) at the likes of Lloyds.
#2: Dividends return: Helped by its robust capital position Lloyds announced at February’s full-year results that it was reinstating dividends. The bank said that it plans to “resume [a] progressive and sustainable ordinary dividend policy.” City analysts certainly expect shareholder payouts to keep growing over the next couple of years too. Thus Lloyds sports chunky yields of 4% and 5.5% for 2021 and 2022 respectively.
#3: Riding the digital wave: In a difficult year Lloyds at least continued to make progress on making its business more digital. Customer satisfaction rates keep on improving in this area and the bank added 2m mobile app customers in 2020. The FTSE 100 firm has also digitalised 78% of its cost base now, beating its own targets for creating a more efficient company.
Threats to the Lloyds share price
That said, there are still significant threats to the bank’s long-term profits outlook. These could cause fresh trouble for the Lloyds share price:
#1: Low interest rates: An environment of rock-bottom interest rates has been damaging earnings at the likes of Lloyds for more than a decade now. Weak interest rates squeeze the rates that banks lend to borrowers at, and the rates that they offer to savers. But things have got even worse since coronavirus broke out as the Bank of England cut rates to new historic lows. These might remain in place for many years to support the economic recovery as well.
#2: Huge competition: The steps Lloyds is taking to embrace the fast-growing digital banking segment are encouraging. However, there’s no guarantee that this technological drive will prevent its customer base from steadily eroding. More digitally-based rivals are set to enter the British market (JP Morgan is the latest to throw its hat into the ring). So Lloyds will have to keep investing heavily to try and stay ahead of the pack.
In conclusion…
It’s quite possible that the Lloyds share price could keep surging. But I won’t be investing in the FTSE 100 bank, given the still-uncertain economic outlook and soaring competition. I’d rather buy other UK shares for my ISA.
