I think Lloyds Bank (LSE: LLOY) is one of the best shares to buy now, considering its recovery potential over the next 12 to 24 months.
At the beginning of the pandemic, some analysts speculated that lenders like Lloyds would collapse under the weight of consumer and business defaults. Luckily, government action prevented this doomsday scenario.
And since then, the group has been able to capitalise on the housing market recovering. As one of the country’s largest mortgage lenders, Lloyds Bank has taken advantage of the booming housing market. It has locked in large loans for homebuyers at attractive interest rates.
This borrowing has offset declines in other areas of the business, helping the enterprise pull through the pandemic.
Now the company is primed for recovery, and that is why I believe this is one of the best shares I could buy now.
While mortgage lending is one of the most essential parts of the group’s operations, it has been growing out its consumer credit business in recent years. The acquisition of credit card firm MBNA several years ago, help catapult Lloyds into the ranks of the country’s biggest credit card providers.
It also helped improve the company’s profit margins. The lender’s net interest margin, the difference between the interest rate it pays to depositors and receives from borrowers, has remained steady over the past decade. It has remained constant even though interest rates have fallen. Management has offset declining interest rates by expanding into credit cards, which tend to carry higher interest rates.
I expect this part of Lloyds Bank to drive the group’s recovery as the economy reopens. Consumer spending has been increasing gradually over the past few months, although consumers are still saving money overall. All as the economy reopens and growth returns, I believe this trend will go into reverse. This may translate into rising profits for Lloyds’ credit card arm.
What’s more, the market is beginning to speculate that the Bank of England could start to raise interest rates next year. This would help the lender raise rates across the rest of its business, further improving profitability.
Based on these factors, one group of City analysts believes the stock could be worth as much as 60p.
One of the best shares to buy now
I believe Lloyds Bank is one of the best shares to buy now, considering its recovery potential. However, the group may face risks as we advance.
There is no guarantee interest rates will increase next year. Further, there is no guarantee the economic recovery will continue. There is also a risk that regulators may move to cap credit card interest rates. This would curb group profitability and almost certainly reduce growth.
I would buy Lloyds Bank for my portfolio despite these risks and challenges, considering the lender’s recovery potential.
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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.