After years of lukewarm performance, I think 2022 could be a charmed year for Lloyds Bank (LSE: LLOY). There is no doubt that there is still a whole lot of uncertainty in the macroeconomic environment. But it is also true that because of this, it is easy to overlook how much is now going for the bank.
Interest rates rise
Just earlier this week, the odds turned even more in its favour. The UK’s inflation rate unexpectedly came in at a high annual rate of 5.1% for November. High inflation was expected, to be sure, but the jump was higher than anyone’s expectations. The fact that the Bank of England targets an inflation rate of 2% puts this into context. Reacting swiftly to this development, the central bank stepped in to increase its key interest rate to 0.25% from 0.1% earlier.
Lloyds Bank stock could gain big
FTSE 100 banking stocks rallied on this news. Naturally so. High interest rates give banks more leeway to increase their own lending rates as well. This in turn could improve their margins. Moreover, this is hardly a one-time interest rate increase. Inflation is expected to stay elevated over the next year as well. As a result, there could be successive rate hikes by the central bank and by commercial banks as well.
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I think that Lloyds Bank, along with Natwest, stands to gain far more than other FTSE 100 banks from this development. This is because most of its business is derived from the UK, unlike most others.
Higher potential dividends, low P/E
There is one more reason to believe that it can gain big in 2022. Banks can now pay dividends at their own discretion. Some readers might recall that early on in the pandemic, the authorities had asked them to stop paying dividends to ensure the stability of the financial system and even the economy. They were later allowed to pay some dividends based on a formula calculated according to the nature of their assets. However, more recently, even these “guardrails” as the Bank of England put it, were removed.
Before the pandemic, Lloyds Bank had an eye-watering double-digit dividend yield. In 2021 so far, its yield is 2.7%, which is a far cry from where it used to be. I reckon its share price could start rising as its increases its dividends, because that will make it far more attractive from a passive income perspective.
Further, its price-to-earnings (P/E) ratio is also quite low at around seven times. Based on this and fundamental factors, I had earlier forecast that the stock could actually rise to 100p in time.
What could go wrong
Of course, it goes without saying that the pandemic could still play spoilsport. We cannot foresee how the situation will play out, and if it does worsen, the recovery might be affected. And that is never good for banks, because there is limited demand for loans then. If, however, we are able to move past the current pandemic situation sooner rather than later, I reckon the Lloyds Bank stock could double over the next year, making it one of my best investments for 2022.
