After a poor 2020, the Lloyds Banking Group (LSE: LLOY) share price has had an extraordinary performance year to date. This has left me, and many investors, wondering if it the rally might run out of steam. However, I believe there are three solid reasons that could cause the share price to keep rising.
1) Interest rates
As the economy improves after the Covid-19 pandemic, it is looking increasingly likely that the Bank of England will raise interest rates in the not too distant future. The official Bank of England base rate has remained at 0.1% since March 2020, stimulating borrowing and spending, in an attempt to boost the economy. This has led to significant inflation, running much higher than the central bank’s 2% annual target. The governor of the Bank of England, Andrew Bailey, has even warned that action may be taken to curb inflation. By all accounts a rate rise will come in early 2022, but some believe it could come as early as the bank’s November meeting. Greater interest rates will essentially mean that Lloyds might be able to charge more for lending. This could lead to a greater ‘bank spread’ for Lloyds, increasing its profitability.
2) The Embark acquisition
Lloyds will soon complete its acquisition of Embark Group, a financial services company. According to Embark’s website, it is one of the largest retirement solutions providers in the UK. The acquisition will add roughly £35 billion of assets to Lloyds’ balance sheet, and will bolster its Scottish Widows brand. The acquisition is expected to be completed by the end of the year, and while it is likely already priced into the Lloyds share price, the completion of the acquisition may provide a nice catalyst to send the price higher. If Embark manages to synergise with any of Lloyds’ brands, then we may see a positive long-term effect in profitability.
3) Earnings
On October 28th, Lloyds announced its Q3 earnings, and it was good news for investors. Profits more than doubled, outperforming analyst estimates by a good margin. It was also revealed that Lloyds is holding roughly £4 billion in excess capital. In my opinion, Lloyds is likely to put this capital to good use. Whether that could mean more acquisitions, buybacks, or a nice dividend payout, I don’t know. Regardless, I think the company’s end of year earnings announcement could provide a huge catalyst for the share price. While I wait, however, investors may begin to price in a more optimistic future for Lloyds, and the share price may even benefit from a ‘lagged earnings’ effect.
Take all of this with a pinch of salt. The future of the economy is anything but certain at the minute, and the same can be said for interest rates and earnings announcements. Although I believe that these three reasons could lead to a rise in the Lloyds share price, it doesn’t necessarily mean that they will. Despite this, I will continue to pay close attention to Lloyds in the coming months.
