Lloyds Banking Group (LSE:LLOY) remains one of the most actively-traded stocks on the FTSE 100. That said, the Lloyds share price is flat over the past year and sits at 42p. The last time it was above 60p was back in 2019. To get back even close to that level anytime soon, I feel several things need to happen.
Hedging net interest income
Q3 2023 net interest income fell to £3.4bn from £3.5bn in Q2. Over the past year, the bank has really benefitted from the increase in interest rates. This has allowed the firm to increase the net interest margin (the difference in the rate charged on loans versus what it pays out on deposits).
In its latest presentation, the bank said it expects the base rate to stay the same for 2024, before falling in 2025. This would negatively impact the net interest margin if it doesn’t do anything. However, it has the ability to hedge the interest rate exposure, effectively locking in the higher rates.
If it does this, the income made from this area should remain high and even increase if the bank can justify lowering deposit rates for customers next year.
A risk is that the bank hedges the risk but interest rates increase next year. In this way, Lloyds will lose out while other banks that didn’t lock in could benefit.
Keeping costs down
Over the past year, the firm has made £189m in active cost savings. However, pay and inflation has added £210m to operating costs over the same period. Other factors mean operating costs are up 5% over the year.
Lloyds needs to get costs down in order to become a more profitable business. It can’t just rely on growing revenue, it needs to work on reducing expenses.
Even though this might be unpopular, I think it can still close more physical branches and push clients to self-serve digitally. This also reduces employee headcount and wage inflation.
If the bank can reduce costs next year and grow revenue to the point that profits rise by 20% (which is feasible), then I’d expect the stock to rally.
Increase in dividends
Finally, we need to wait for the full-year results to find out the next dividend per share payment. However, the message over the past year has been that the board are pushing to increase it. The 2.52p figure from the past 12 months marked an increase from the 2.13p in the period before.
With a current dividend yield of 5.94%, a further increase in the payment could really attract income investors. For example, I think the annual dividend could rise to 2.90p. This would raise the yield to 6.84%.
If this does happen, the share price should start to rally as investors try to lock this in.
The risk to my overall view is that if none of these points come to fruition and the Lloyds share price could remain in the doldrums. Yet based on the latest results, I think the management team have similar thoughts to mine.
