Earlier this week, the FTSE 100 banking biggie, Lloyds Bank (LSE: LLOY) finally put the market crash behind it. The Lloyds Bank share price breached 40p, going back up to pre-crash levels.
UK Budget 2021 lifts banks’ shares
The possible reason for the latest share price rise is not hard to find. The UK Budget 2021 stated it will review the 8% bank surcharge. The surcharge is an additional tax on profits over and above the corporation tax.
This could add to banks’ competitiveness and also support London in maintaining its position as a global financial capital. There is no Brexit deal on financial services so far.
Financial services is important for the UK, contributing to about 7% of the economy. According to the UK Parliament, London alone generates half of this.
It is no coincidence then that the Lloyds Bank share price first spiked above the 40p level on budget day.
It is also no coincidence that other FTSE 100 banking entities have seen a run-up since. As I write, Standard Chartered is the biggest gainer, with a 5% share price jump. HSBC, Natwest, and Barclays have also shown over 2.5% increases in the day.
Dividends resumed too
This is the second piece of policy good news in the last three months to give a fillip to UK’s banks. In December, the Bank of England’s Prudential Regulation Authority (PRA) eased rules for dividend payment.
UK’s banks, including Lloyds Bank, responded swiftly by returning to dividend payments. The extent of those dividend payments, however, is still directed by the PRA. As a result, the dividend yield is still fairly low. LLOY’s dividend yield, for instance, is a muted 1.4%.
Rising dividend yields?
But this may change too, bringing in a third piece of good news. The PRA has said that the restrictions on the extent of dividend payouts are temporary.
This means that as and when they are unrestricted, banks’ dividends and dividend yields can inch closer back to where they were pre-pandemic and pre-stock market crash.
What is next for the Lloyds Bank share price
A high dividend yield has been one of Lloyd Bank’s attractive features to investors in the past. A potential increase in dividends can help the Lloyds Bank share price to rise more. As can any follow-up developments on the bank surcharge.
Even otherwise, as the lockdown ends and the economy is back on its feet, things can get much better for banks. The housing market is booming in any case.
Late last year, there were reports of banks increasing interest rates in response to demand for housing loans. The UK Budget 2021 also continues its support for property markets, and house builders have reported strong order books for 2021. This bodes well LLOY, the UK’s largest mortgage lender.
What can go wrong for LLOY
But interest rates are low and likely to stay so, meaning that LLOY’s bottomline can continue to be impacted. Further, the extent of bad loans that banks suffer because of the pandemic will only be known over time.
I am watching the Lloyds Bank share price though, as the environment improves around it slowly.