One of the UK’s most popular and widely watched shares is Lloyds Banking Group (LSE: LLOY). As a leading UK retail bank, Lloyds has over 30m customers. It also has around 65,000 employees, many of whom own bank stock. And after collapsing dramatically during 2020’s Covid-19 crisis, the Lloyds share price has rebounded strongly from its September 2020 lows. It’s also outperformed the FTSE 100 index so far in 2022. But I expect more good news for Lloyds shareholders, especially if the UK economy strengthens.
The Lloyds share price roller-coaster
Before coronavirus swept the globe, the Lloyds share price was holding up just fine. On 13 December 2019, the stock closed at 64.3p, before easing back to end 2019 at 62.5p. But as the Covid-19 pandemic unfolded, Lloyds shares collapsed. On 3 April 2020, Lloyds closed at 27.73p, before rebounding in the summer. However, Lloyds shares found an even lower low, hitting a rock-bottom price of 23.58p on 22 September 2020. The very next day, I said that I saw a lifetime of value in Lloyds.
Then along came ‘Vaccine Monday’ (9 November 2020), with news of highly effective Covid-19 vaccines. By the end of 2020, the Lloyds share price had recovered to 36.44p. It also had a great 2021, ending the year at 47.8p and up almost a third (31.2%). Lloyds also restored its cash dividend in the second half of 2021, having cancelled it in spring 2020. On Friday, the Lloyds share price closed at 51.38p. That’s a 7.5% gain since December, versus just 1.8% for the wider FTSE 100. But I think there could be more to come for this stock in 2022-23.
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What do I like about Lloyds today?
I don’t own this stock, but I’d happily buy it at the current Lloyds share price. Here’s why. First, Lloyds is a £36.5bn FTSE 100 heavyweight operating under a host of top brands. It has the UK’s largest mortgage book and is a leading supplier of credit to households and businesses. Its major brands include Lloyds Bank, Halifax, Bank of Scotland, Birmingham Midshires, Scottish Widows, MBNA, and Black Horse.
Second, with UK inflation soaring, the Bank of England raised its base rate on 16 December and 3 February (last Thursday). The base rate is now 0.5% a year, from 0.1% before these two rate rises. Higher interest rates are positive for banks, boosting their net interest margins (NIMs). And with more rate rises expected in 2022-23, Lloyds should earn a higher spread between its lending rates and savings rates.
Third, if mortgage lending stays strong and consumers start spending on credit again, this loan growth should lift Lloyds’ profitability. Likewise, if businesses gain confidence and start borrowing more, this could support the Lloyds share price. Finally, Lloyds has billions of pounds of spare capital on its balance sheet. It could choose to return some of this as higher cash dividends and more share buybacks.
Finally, Lloyds shares look cheap to me right now. They trade on 7.8 times earnings and an earnings yield of 12.8%. Though the dividend yield of 2.3% is low, I expect it to increase over time. These are undemanding fundamentals, suggesting to me that this stock remains in value territory. But if Covid-19 returns with a vengeance, then the Lloyds share price could become very volatile — and even fall steeply again, as it did in 2020!
