Lloyds (LSE: LLOY) shares have had a good run recently. Back in early November, Lloyds’ share price was just 27p. Today, however, it’s at 38p, which represents a gain of around 40% in just three months*.
In the short term, I believe the stock has the potential to keep rising. However, there are a few issues that concern me in relation to the longer-term investment case. Here are some of my thoughts on the future direction of the share price.
Lloyds’ share price: upside potential?
There are a couple of reasons I believe Lloyds shares could continue to rise in the short term.
The first is that UK economic conditions this year are likely to be a lot better than last year. Last month, the International Monetary Fund (IMF) said that it expects to see the UK’s national income, or GDP, expand by 4.5% this year. That’s down from the 5.9% growth forecast it made last October. However, it’s a lot higher than the estimated contraction in UK GDP of 10% in 2020.
Given that Lloyds shares are essentially a proxy for the UK economy, better economic conditions could potentially boost the share price.
Secondly, Lloyds could resume its dividend this year now that the Bank of England has eased rules in relation to banks paying dividends during Covid.
Currently, City analysts expect a dividend payment of 1.62p this financial year from Lloyds. At the current share price, that equates to a yield of about 4.3%. That is certainly attractive in the current low-interest-rate environment.
A high yield could boost demand for the stock from income investors and subsequently push the share price up. It’s worth noting that dividend forecasts can be very inaccurate at times though.
Risks that concern me
One issue that could potentially stall the recovery in Lloyds’ share price, however, is negative interest rates. Just recently, the Bank of England told UK banks they have six months to prepare for negative rates.
Banks earn a lot of their income from the spread between the rates they charge to borrow money and the rates they charge to lend money. The lower rates are, the less opportunity there is to profit. So, negative rates could hit profits at Lloyds.
Another issue that concerns me is disruption within the banking industry. This is what concerns me the most about Lloyds.
Today, many people (especially younger generations) are using traditional banks like Lloyds less and less. Instead, they’re using innovative digital banks such as Monzo and Revolut, which offer superior smartphone user experiences and more digital features.
They’re also increasingly using financial technology (FinTech) companies for banking services. For example, they’re using electronic payment companies such as PayPal (which just had a blowout quarter in which it added 16m new active accounts) to make payments. And they’re using companies like TransferWise to transfer money.
In my view, Lloyds is going to have its work cut out to remain competitive, and relevant, in the years ahead. Over the next decade, FinTech looks set to disrupt the banking industry significantly.
Lloyds shares: what I’m doing
I own Lloyds shares and I’m going to hold them for now. However, there are certainly risks that could hit the share price. I think these risks are worth keeping a close eye on.
* Over the last 12 months, Lloyds shares have fallen approximately 33%
