The Lloyds (LSE: LLOY) share price is up almost 30% this year, making it the seventh-best performing stock on the FTSE 100. Naturally, it took a bit of a hit when the Trump administration announced UK trade tariffs in early April. But it increased by almost 10% each month during the first quarter.
By comparison, NatWest is up around 14% and Barclays is only up 4.5%.
So what’s driving the growth, and can it continue?
Rising interest rates and stronger margins
Lately, one of the biggest growth drivers for Lloyds has been the higher interest rate environment. As a primarily UK-focused retail bank, it generates a significant portion of revenue from net interest income — the difference between what it earns on loans and pays on deposits.
In its most recent results, Lloyds reported a net interest margin of 3.13%, comfortably above pre-pandemic levels. Although the Bank of England is expected to begin cutting rates later this year, Lloyds still has room to benefit from lag effects and repricing of fixed-rate loans.
Adding to that, the UK economy is showing tentative signs of a recovery — even in the face of US trade tariffs. This is critical for Lloyds, as it has no investment division as a backup. Mortgage activity has also picked up, helped by falling fixed-rate deals and expectations of interest rate cuts.
So the stars seem to have aligned for Lloyds after several years of lacklustre growth.
But it isn’t entirely in the clear.
Risks to consider
Lloyds may be having a good year but it still faces some challenges. The eventual outcome of trade agreements with the US is still uncertain and could prompt another downturn for the UK economy. That could lead to a resurgence of inflation that could squeeze household budgets and increase loan defaults.
At the same time, rate cuts may erode the interest margins that have boosted profitability in recent quarters. And the long-term structural issues facing UK banks — such as competition from fintech and low fee income — haven’t gone away.
Looking ahead
Unsurprisingly, 12-month forecasts for Lloyds are fairly low, most likely due to market uncertainty. On New Year’s, some may have expected a 20% increase this year but now, forecasts are more subdued.
The average price target from 19 analysts watching the stock is 78.48p — an increase of approximately 10%. If that happens, a £10k investment would only return £1,000 this year.
Earnings per share (EPS) forecasts are more promising, expected to rise from 7.5p per share to 9.6p by next year. By 2007, it’s expected to reach 11p — a 37.8% increase. If the price were to follow suit, a £10k investment would have returned £3,780 by then.
A cautionary approach
Anybody who was around in 2008 will know that unstable economies are notoriously bad for banks. The word ‘recession’ has popped up frequently in recent weeks, so bank stocks should be approached with caution.
Lloyds’ price is still low compared to earnings, so if the economy stabilises, it still has lots of room to grow. I already own some shares and will keep holding them. But until the global trade situation improves, I won’t consider buying more.
