Shares in British banks suffered sharp falls in 2020. While some have recovered a lot of lost ground, in many cases the share prices still languish below their long-term averages. Shares in Lloyds (LSE: LLOY) moved up over a third in the last quarter of 2021. But I expect the Lloyds share price to continue to rise in 2021. Here are three possible drivers for upward price movement.
The dividend could be restored in 2021
Last year, banks were ordered by regulators not to make dividend payouts while the pandemic impact remained to be seen. That reduced the attractiveness of UK shares of banks such as Lloyds. It has long had a substantial retail investor following in large part because of its dividend.
Last month, the Bank of England announced that it was lifting the ban. That doesn’t necessarily mean that Lloyds will restart its dividends. That also depends on business performance. Prudent management will want to ensure that dividend policy reflects the underlying health and trajectory of the business. However, I expect Lloyds to restart dividends in 2021 as the business is performing well.
The pre-pandemic full-year payout of 3.2p may not sound much compared to some UK shares. But as the Lloyds share price currently sits at around 35p, that dividend equates to a high single-digit yield. For a FTSE 100 financial powerhouse, that is a highly agreeable yield to me.
Business performance is recovering
Lloyds returned to profitability in the third quarter. Deposits are up strongly and the mortgage book is growing. The group – which operates under brands including Bank of Scotland and Halifax, as well as Lloyds – now has the most digital customers of any UK bank. With the move online seen in many businesses last year, Lloyds looks set to capitalise on new, digital business growth opportunities.
Banks are in much better shape now than they were during the last financial crisis. Some key lessons were learned from that crisis, including on capital ratio adequacy. So while the market has priced banks as if they could suffer in this recession like they did back then, I regard that as unlikely. The Lloyds share price still lags its business performance, in my view. But the resilient business performance could help propel it higher in 2021.
Investor sentiment could propel the Lloyds share price
Many UK shares struggled last year even while some foreign markets surged. I see deep value in the UK market overall but that is for a reason. Uncertainty about Brexit has hung over the market for a long time.
In 2021, I expect that to fade away. Investors are likely to reevaluate UK shares and in many cases the value will attract them. Lloyds is UK-focussed so Brexit poses limited risk to its business in my view. I do think it suffered from pessimism about UK market prospects overall. If that pessimism melts away in 2021, and investors look at the business fundamentals, the Lloyds share price should benefit. I accept no one knows which way the broad market will head this year. But as the banking sector moves back into dividend paying mode and Brexit fears recede, I see Lloyds as a prime potential beneficiary of a positive change in sentiment.
