Buying shares of Lloyds Banking Group (LSE:LLOY) is one of the most popular investments here in the UK. Yet as I’ve previously explored, the stock hasn’t exactly been a great performer. In fact, over the last five years, the share price has fallen by 26%. Considering the FTSE 100 only fell by 3% over the same period, I think it’s fair to say that Lloyds shares were not a smart investment back in December 2016.
But in 2021, the stock has actually managed to climb by an impressive 30%, leaving the FTSE 100 in the dust. Is this just momentum from the pandemic recovery? Or are there other tailwinds at play? Let’s explore whether I should be considering this business for my portfolio today.
Lloyds shares versus interest rates
Like any bank, Lloyd’s makes a good chunk of its income from charging interest on loans issued to individuals and businesses. But with interest rates being exceptionally low over the last decade, it hasn’t exactly created an ideal environment for it to thrive in. And when the pandemic struck, interest rates were again cut to nearly 0%. That’s fantastic for consumers – not so much for banks.
With inflation on the rise, an interest rate hike seems inevitable in 2022. That’s obviously good news for Lloyds’ profit margins and could be one of several contributing factors behind the impressive performance of its shares in 2021. But suppose the Bank of England is correct in its assessment that rising inflation is only temporary. In that case, this tailwind may not last long. Fortunately, the company seems to have other tricks up its sleeves.
New management with a new plan
In August this year, shareholders welcomed Charlie Nunn as the new CEO. And with this change in leadership came a new growth strategy that intends to considerably expand the bank’s presence in the property sector. Traditionally banks issue mortgages to help individuals buy a home. But Nunn wants to take it one step further by also becoming Britain’s largest private landlord.
The objective is to buy 50,000 residential properties over the next 10 years and then rent them out to create a new and recurring stream of income. This move helps diversify the group’s revenue sources and makes its profits less dependent on interest rates that are beyond its control.
Needless to say, that’s good news for the price of Lloyds shares. And it’s why I think it’s a smart move by management. It’s too early to say whether Nunn’s strategy is working, but the most recent earnings report did beat earnings expectations by nearly 50%!
Taking a step back
Banks are complicated businesses with lots of moving parts. Unfortunately, this also means there is plenty of room for error. The original lending side of operations is constantly exposed to risks of loan defaults, even with rigorous credit checks. And the planned foray into the residential property sector could backfire if house prices suddenly start falling.
But if the new strategy succeeds, then the reward for shareholders could be substantial. However, I think there are better (and simpler) growth opportunities to pursue elsewhere.
