The last few months have been frustrating for Lloyds Bank (LSE: LLOY) shareholders. In early June, Lloyds’ share price was near 50p. However recently, it’s been back in the low 40s.
So, where do Lloyds shares go from here? Will they rise again or is there more downside ahead?
3 reasons Lloyds’ share price could rise
In the short term, I think Lloyds shares have the potential to rise. The stock’s very cheap (forward price-to-earnings ratio of just six) and there are a few things that could push the share price up.
For starters, if the world gets on top of Covid-19, we could see money flow back into ‘cyclical’ stocks such as banks. Cyclicals did very well early in the year on the back of vaccine optimism. However, in recent months, there’s been a big shift out of cyclicals into high-quality stocks (such as the Big Tech companies) on the back of Covid-19 uncertainty. Plenty of market strategists believe that cyclical shares will start outperforming again in the near future. If they do, Lloyds’ share price could rise.
Meanwhile, if near-term economic growth is strong, we could see some small interest rate hikes. This could also boost Lloyds’ share price. UK rates are still at emergency low levels of 0.1% and I don’t expect them to stay this low forever.
An interest rate rise would be good for banks as it would enable them to increase their net income margins (the difference between the interest rates on borrowing and lending).
Finally, if Lloyds increases its dividend payouts (the Bank of England has lifted its ban on bank dividends), the stock could move higher. Higher dividends may increase the appeal of owning the stock among income investors.
Of course, all of this depends on Covid-19. If the pandemic gets worse, economic growth is likely to slow. This would most likely impact Lloyds’ profits and dividends as well as its share price.
Better stocks for the long term?
In the long term, I’m not so confident in relation to the outlook for Lloyds shares. One reason is that we are likely to see a massive amount of disruption in the banking industry in the years ahead.
We’re already seeing this now with digital banks such as Monzo and Revolut and FinTech companies such as Wise, PayPal, and Klarna capturing market share. Traditional banks such as Lloyds have their work cut out to remain relevant.
There’s also the issue of interest rates. While I think we could see some small rate rises in the years ahead as economic growth picks up, rates could remain relatively low for quite a while. This could hamper Lloyds’ profit growth.
Lloyds shares: my move
I own some Lloyds shares and I’m going to hold onto them for now. I do think there’s upside potential in the short term.
However, at some stage in the not-too-distant future, I’ll be looking to offload them. My plan is to move the money into stocks with stronger long-term growth potential.
