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The Lloyds share price could be on the cusp of massive gains and here’s why

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The Lloyds (LSE: LLOY) share price has spent recent months oscillating up and down between 40p and 50p. That’s perhaps understandable as it faces a lot of risks from potential increased bad debts as furlough ends, supply chain restraints possibly slowing the UK economy, the end of the Stamp Duty holiday hitting mortgage demand, the US wrangling over its debt ceiling, and the potential collapse of Evergrande. Yet I feel there are reasons to think the bank may be on the cusp of massive gains.

Boosting the Lloyds share price

There are four main catalysts that could I think boost the Lloyds share price. First is an effort by the industry to relax some of the rules imposed after the 2008/09 financial crash. The industry is keen to relax the retail bank ring-fencing rules and the government has been looking into the idea in a review. This may be less applicable to Lloyds directly as it doesn’t have an investment banking arm, but if it comes in it should lift the shares prices of all UK banks.

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In August this year, a new CEO started at Lloyds. Charlie Nunn joined from HSBC. He brings with him significant experience in wealth management which is a newer and higher-margin area that Lloyds started moving into under the previous CEO.

That brings us to new growth avenues. Lloyds, more than the other UK banks, seems keen to diversify away from core activities. That’s perhaps because it doesn’t have investment banking operations like many of its peers. So as well as wealth management, it’s becoming a landlord.  

The final catalyst is probably the big one, but it’s beyond the control of Lloyds’ management. It’s all about any rise in interest rates. If inflation proves not to be transitory, it could really help banks’ profits. Time will tell if interest rates will rise.

On top of these four catalysts, when looking at the fundamentals, Lloyds seems like a buy for me. Lloyds has a low P/E ratio of seven, and price-to-book value, both of which suggest the shares are cheap. On top of that, the dividend is growing once again. The pandemic seems to have done little lasting damage (so far) and so I feel the bank could get back to the 70p or so level it reached at the end of 2019.

Would I buy Lloyds?

As pointed out at the top of the article there are a lot of events that could impact investor appetite for risk. If most investors become worried, then the shares of cyclical industries like banks and miners are likely to be hit the hardest. That’s what usually happens. So for now, despite the catalysts for growth at Lloyds, I’m holding off from buying the shares.

I may revisit that decision as we approach Christmas and hopefully some of the supply chain and end-of-furlough concerns, as well as the global economic worries, will have abated. Then it could be clearer if the Lloyds share price has a bright future.

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Andy Ross owns no share mentioned. The Motley Fool UK has recommended HSBC Holdings and 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.

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