The Lloyds Banking Group (LSE: LLOY) share price hasn’t traded above 100p since November 2008. Lloyds’ stock crashed at the start of the financial crisis and hasn’t ever recovered.
I suspect some shareholders have given up hope. However, recent news suggests that in February, chief executive Charlie Nunn will reveal his plans for returning this business to growth. If he’s successful, I think Lloyds shares could have a chance of returning to 100p.
The UK’s biggest landlord?
Lloyds is already the UK’s largest mortgage lender. The bank now hopes to become one of the country’s biggest rental landlords.
Lloyds’ new housing division, Citra Living, is starting small. But management hopes to have 400 properties by the end of 2021 and 1,200 by the end of 2022.
Looking further ahead, a partnership with housebuilder Barratt Developments means Citra will be able to fund purpose-built rental developments, bypassing the general property market.
A recent report in the FT suggested that Nunn is expanding his ambitions for Citra and may increase its initial budget from £250m to £1bn. Lloyds hasn’t confirmed this though, so it’s still speculation at this point.
In addition to rental property, Nunn is also thought to be considering expanding the bank’s commercial operations. This includes business-facing services such as insurance and corporate lending.
What’s good — and what’s bad
Lloyds should be able to fund property purchases and new developments very cheaply. If the rental business is run well, I think it could be more profitable the Lloyds’ current banking operations.
However, expanding into new business areas always carries some risk. Operating a large portfolio of rental property is a specialist business that’s quite different to mortgage lending. If things go wrong, costs could rise sharply. Lloyds’ reputation could suffer.
Similarly, my sums suggest that expanding Lloyds’ commercial banking operations could boost the profitability of the group. Indeed, Lloyds used to have a bigger commercial bank before the financial crisis. These operations were scaled back during its turnaround.
Trying to reverse these changes and expand the commercial bank will mean competing with banks that haven’t made such harsh cutbacks. This may not be easy.
Lloyds share price: what I’d do
If Nunn can generate growth and improve Lloyds’ profitability, then my sums suggest a return to 100p could be quite possible.
However, one of the things I like about Lloyds is that it’s a fairly simple business. My fear is that the rumoured changes would make Lloyds’ business more complex and increase the risk of unforeseen problems.
Whatever happens, I don’t expect Lloyds’ share price to return to 100p in 2022. In my view, the changes being suggested will take several years to deliver results, so shareholders will need to remain patient.
In the meantime, broker forecasts suggest Lloyds’ earnings will fall by around 20% next year.
Although the bank’s forecast dividend yield of 5% looks safe enough to me, I can’t get excited about Lloyds at the moment. I’m going to wait to find out more about Nunn’s plans before I decide whether to buy the bank’s shares.
