For the past 18 months, the Lloyds (LSE: LLOY) share price has struggled to move higher. However, I think there are several reasons why the stock could push higher next year and wake up from its multi-year slumbers.
The great reopening
The Lloyds share price has been under pressure for a number of reasons over the past couple of years. The pandemic, low-interest rates and sluggish economic growth are all why the firm has failed to attract investor interest.
But as the world begins to move on from the pandemic and central banks start to hike interest rates, at least two of these headwinds should abate. That is without taking into account the UK economic recovery, which seems to be gathering pace.
In fact, I believe the two previous headwinds, a lack of growth and low-interest rates, could become tailwinds for the business next year. As the economy continues to recover and the Bank of England (BoE) begins to push rates higher, Lloyds’ outlook could improve dramatically in 2022.
Higher interest rates will enable Lloyds to increase the rates it charges borrowers. For the past decade or so, interest rates have only gone one way, down. And as banks have fought over each other for business, they have pushed borrowing rates lower and lower.
If the BoE starts to raise interest rates, this race for the bottom should end. There are some signs it has already begun to slow with mortgage lenders raising rates across the board. This could have a significant impact on Lloyds’ bottom line.
Lloyds share price potential
Higher levels of profitability will provide management with the headroom required to increase the company’s cash returns to investors. Before the pandemic, Lloyds was rapidly becoming a dividend champion. It has the potential to regain this crown in 2022 if interest rates rise and the UK economy continues to bounce back from coronavirus disruption.
All of the above factors could be significant catalysts for the Lloyds share price in 2022, although there are a couple of risks facing the business I will be keeping an eye on.
These include inflationary factors, which could push up costs. Competition in the banking sector may also restrict the firm’s ability to raise interest rates for consumers. Then there are also regulatory factors to consider.
Last year the bank was banned by regulators from paying dividends in the pandemic. If there is another economic event, regulators may place stringent demands on the lender once again.
Still, despite these risks and challenges, I would be happy to buy the stock for my portfolio today.
The Lloyds share price is a UK economic bellwether. As the economy recovers, I think the business may reflect this return to growth. That is assuming none of the risks above force the lender’s management to take evasive action.
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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.