I’ve been thinking lately about some of the shares I’d like to stock up on in my portfolio for 2022. One of them is Lloyds (LSE: LLOY). I think the bank could perform strongly in 2022. Here’s why.
Three reasons I remain bullish on Lloyds
The Lloyds share price has already had a strong run. It has increased 36% over the past year, at the time of writing this article earlier this week. But I continue to see possible upside. Here are three reasons why.
First, the bank’s mortgage book remains highly profitable. The book stood at £308bn at the end of September. Economic resilience could help keep defaults low, making this a rich seam of profits. As many of the mortgages last for decades, I expect this to help propelling Lloyds’ profits not just in the next several years, but for the long term too. Rising interest rates could boost profitability.
Secondly, the company has been moving into new business areas including growing its own residential property portfolio. I have mixed views on this. I see a risk that it distracts management from the core banking business. On the positive side, if these new business ventures work well, they could add a new string to the bank’s bow.
Thirdly, I like the company’s strong balance sheet. It could help fund a much higher dividend. It also means Lloyds is better prepared for any economic downturn than it was at the time of the last financial crisis.
Where will Lloyds go in 2022?
The upwards share price movement has been strong. But I still don’t think the Lloyds share price fully reflects the company’s financial potential. For example, in the first nine months of the year, Lloyds made a profit attributable to ordinary shareholders of £4.6bn. Yet its current market capitalisation is just £33bn.
That seems very cheap to me. If Lloyds can keep its business performing strongly I think that could lead to the shares moving up next year. Another trigger could be a much bigger dividend. Lloyds could fund that from its current excess capital. Many investors already expect a raise, so it may be factored into the share price already. But I still think any such announcement could be positive for the share price, especially if the dividend increase is large.
Then again, the shares could go lower. Initial costs building up the property business could hurt profits. On top of that, if the broader economy declines, that could hurt Lloyds’ profits. For example, struggling businesses defaulting on loans could lead to bigger provisions. That would likely translate to smaller profits.
But overall, I remain bullish on the bank. I think it could move up in 2022. That’s why I’d happily add to my position today.
