Lloyds Bank (LSE: LLOY) shares are having a great run. Recently, they climbed to 53p – its highest level since February 2020. Could the stock hit 60p this year? I think there’s a good chance it could. Here’s why.
Why Lloyds’ share price could hit 60p in 2022
Right now, the business environment for UK banks such as Lloyds appears to be quite favourable. This year, the International Monetary Fund expects the UK economy to grow by 5%.
While that would be a lower rate of growth than in 2021 (6.8%), it’s still a very healthy level, and well above historical long-term averages. This should benefit Lloyds, which is often seen as a proxy for the UK economy.
Meanwhile, the Bank of England (BoE) is now raising interest rates. This is also good news for the banks, as higher rates allow them to generate a larger spread between their lending and borrowing rates, which can lead to higher profits.
Last month, the BoE lifted its key rate from 0.1% to 0.25%. Analysts at FocusEconomics – a leading provider of economic analysis and forecasts – see UK rates ending 2022 at 0.6% and 2023 at 0.92%.
Rock-bottom valuation
The thing is though, while the outlook for Lloyds is very encouraging, the stock’s valuation is still extremely low. For the year ending 31 December 2021, City analysts expect Lloyds to generate earnings per share of 8p. That means at the current share price of 53p, the stock’s price-to-earnings ratio is just 6.6.
I think there’s plenty of room for valuation expansion here. If Lloyds shares were to hit 60p, the P/E ratio would only be 7.5, which is still very low. This is one reason why I think an elevated share price in 2022 is certainly achievable.
However, it’s not just the valuation that stands out here. There’s also the dividend and the potential for share buybacks. In terms of the dividend, analysts currently expect Lloyds to pay out 2.11p per share for 2021.
At the current share price, that equates to a yield of around 4%, which is very attractive in today’s low-interest-rate environment. The healthy payout here could tempt income investors into the stock, pushing its share price higher.
Risks
Of course, there are risks to my 60p investment thesis. One is Covid. Omicron and other new variants could potentially derail the UK economic recovery. If we did see the recovery stall, the BoE would most likely pause its interest rate hikes in a double blow to Lloyds.
Another risk is general stock market volatility. Last year, volatility was very low. This year, many market strategists expect it to be significantly higher. A bout of market turbulence could see Lloyds shares decline.
Overall however, I’m cautiously optimistic that Lloyds’ share price can hit 60p in 2022. That’s why, as a holder of the stock, I’m holding on for now, despite the strong gains it has generated over the last year.
