2022 has started positively for shareholders in Lloyds Banking Group (LSE: LLOY). The Lloyds share price ended 2021 at 47.8p and closed on Wednesday at 50.87p, up 0.96p (+1.9%). It was only around 37p a year ago. Thus, the Black Horse bank’s stock has gained over 3p since 2021, a healthy rise of 6.4%. However, the shares could be affected by a number of scenarios in 2022-23, not least the spread of Covid-19. Here are five potential factors that could support and lift the stock over the coming 12 months.
1. Rising interest rates
After years of near-zero interest rates, the Bank of England raised its base rate last month. In December, bank rate rose from 0.1% a year to 0.25%. Although this is a tiny step, the BoE has indicated that the bank rate could rise several times this year to curb inflation. As interest rates rise, net interest margins (NIM) widen. NIM is the spread between banks’ (higher) lending rates and (lower) savings rates. And a higher NIM translates into more net interest income, boosting bank profits. Hence, Lloyds will be quick to pass on rate rises to UK borrowers, not least to support its share price.
2. Sustained mortgage growth
Good, old-fashioned lending growth could boost Lloyds’ earnings. As the UK’s market leader in mortgages, Lloyds’ fortunes are strongly tied to the housing market. And with UK house prices surging in 2021, mortgage lending is back in rude health. However, many of the cheapest mortgage deals have already been withdrawn or repriced higher. Also, tracker mortgage rates will creep up in line with Bank rate rises. So higher mortgage rates means more interest income, helping to support the Lloyds share price.
3. Growth in consumer credit
For two years, there has been negative or negligible growth in consumer credit like loans and credit cards. But recently there have been signs of a tentative recovery in consumer demand for credit. This good news for Lloyds, which is #2 in UK credit cards and a major provider of personal loans. Lloyds has links to 14m households and 30m customers, so strong growth in consumer spending and borrowing should be positive for the Lloyds share price.
4. Rising corporate earnings
Thanks to massive government support, British businesses have ridden out the Covid-19 storm fairly well. But if UK economic growth picks up, this could lift corporate earnings. And as company profits and business optimism rise, firms might be keener to borrow. This would be beneficial to Lloyds, which has a market share of 19% of lending to small and mid-sized British businesses.
5. Share dividends and buybacks
Finally, Lloyds may have £4bn and more in excess capital on its balance sheet. With the banking regulator’s permission, it could boost future cash dividends. Lloyds cancelled these payments in spring 2020, but resumed in May 2021. Also, its spare capital could be used to fund share buybacks. And higher dividends and buybacks can strongly support and boost share prices.
I don’t own Lloyds stock today, but I’d buy at the current share price. To me, LLOY looks cheap on fundamentals. However, Lloyds 2022 results could suffer from a lack of loan write-backs, which strongly boosted its bottom line last year. Also, the bank’s move to become a major domestic landlord increases its exposure to house prices. Finally, the shares could take a real beating if coronavirus turns nasty again!
