The Lloyds (LSE:LLOY) share price was relatively volatile throughout 2020. In the early days of the pandemic, it was swinging up and down by double-digits over the space of a few weeks. But recently, things seem to have stabilised, and it’s now on a (mainly) upward trajectory.
Over the last 12 months, the Lloyds share price has increased by 28% reaching 41p. This moves it closer to pre-pandemic levels of around 55p. But why is it now rising? And should I be adding the stock to my portfolio? Let’s take a look.
The Lloyds share price in 2020
Lloyds is the second largest bank in the UK. And consequently, its performance is ultimately tied to that of the nation’s economy. This proved to be incredibly problematic in 2020 as the UK experienced one of the largest economic contractions ever recorded, with billions of pounds being lost.
And that’s not the only challenge the bank had to contend with. Interest rates were once again cut, dropping to nearly 0%. This added even more pressure to Lloyds’ profit margins due to the reduced income from its business loans. What’s more, with both the impact of Covid-19 and the impact of Brexit, it’s unlikely that interest rates will be rising back to more favourable levels any time soon.
All things considered, I’m not that surprised that the Lloyds share price plummeted to its lowest point in nearly a decade.
Will the Lloyds share price recover in 2021?
The UK government and devolved nations’ governments have been unveiling plans to ease lockdown restrictions as the vaccine rollout continues. Based on the proposed roadmap, many non-essential stores can expect to reopen their doors next month.
Needless to say, this is fantastic news for small retail businesses and for Lloyds as well as many of its customers will be able to more easily repay their debts. These repayments, in turn, should increase the bank’s ability to create new loans for its customers, leading to higher profits. In fact, this already appears to be happening. Looking at the final impairment costs (expenses incurred because a customer couldn’t repay a loan) for 2020, the losses came in at £4.2bn. While that’s substantial, it’s approximately 25% lower than what had been expected by City analysts.
The bottom line
Because Lloyds makes its money from interest payments on its loans, operating in a low-interest-rate environment is quite challenging. And while the UK economy might begin to reopen in the next few months, it could be a long time before loan repayments return to their pre-pandemic levels, especially if reopening plans are delayed.
But, despite these risks, I’m cautiously optimistic. And the management team appears to have a similar mindset. It has reinstated a 4% dividend yield with payments starting from April. Personally, I believe the Lloyds share price will recover in 2021. And so I’m definitely considering it as a potential addition for my portfolio.
