Over the course of 2023, Lloyds Banking Group (LSE:LLOY) shares fluctuated. The Lloyds share price hit highs of 54p in February and lows of 39p in October. By reviewing what were the key factors in moving the stock in 2023, I can look forward to try and forecast what will happen this year.
What helped the stock last year
The release of the full-year results back in February 2023 provided a snapshot of where the business was at the time, which coincides around the period when the stock was at the highest.
One key factor that fuelled this rally was the sharp (and unexpected) rise in interest rates. Underlying profit before impairments was £9bn, up 46% from the previous year. This was driven by interest-earning assets. In other words, higher interest rates were helping to drive larger profits.
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Even though this theme of higher rates persisted later on in the year, I think investors were at peak optimism about the benefits to the bank in Q1. In some ways, we became accustomed to interest rates spirally higher by the time we reached the summer.
Another factor that helped the stock was the increase in dividend payments. At the start of the 2023, the 1.6p dividend announced was a step higher from the 1.33p the year before. The commitment of the board to push forward with further shareholder returns was a positive sign that certainly helped the share price.
What hindered Lloyds in 2023
The low of the year was relatively recent, in October. Part of this can be linked to its Q3 results, which started to show signs that the UK consumer was feeling the financial pinch. This ties in with another factor, the state of the UK economy.
As the UK data has started to underwhelm, the Lloyds share price has fallen. This makes sense, given how sensitive the bank is to the economy. It serves mostly UK retail and corporate clients that are directly impacted by how well the UK does.
The impact of higher interests rates is also a double-edged sword for the bank. If rates get too high, people will start to default on their mortgage payments and take on unsustainable credit card debt.
And my forecast
But I believe Lloyds shares will move back towards the 52-week highs of 54p in 2024. This is based on that fact I believe the UK economy will outperform expectations. I expect inflation to fall, allowing the Bank of England to cut interest rates.
This should help to fuel economic growth. More transactional spending will boost revenue for the bank. Key products such as mortgages should become more affordable, creating higher demand.
The risk to my view is if we head into a recession. This would change my view, as the bank would struggle.
Granted, if we get a lower interest rate it could reduce the net interest income for Lloyds. But the base rate will still be far above the pre-pandemic 0.5% levels.
On this basis, I think investors should consider adding this banking stock to their portfolios.
