As a long-suffering Lloyds Banking Group (LSE: LLOY) shareholder, perhaps I shouldn’t ask myself questions like “Can the Lloyds share price double in 2022?” But it’s been recovering strongly, so a bit of optimism surely can’t hurt.
Lloyds shares were hammered by the Covid-19 stock market crash. And to see them dropping below 30p at their low point was painful. But over the past 12 months, they’re up 55% compared to the recovering FTSE 100‘s 13%. I think that’s just the start, and I’ll explain why.
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The core reason for the Lloyds share price weakness is that banking underlies the entire economy. And much of that economy relies on lending. When business is in a bad patch, banks are pretty much guaranteed to suffer. With Brexit hot on the heels of the banking crisis, followed by Covid-19, it’s hard to remember a worse patch.
Lloyds’ recovery efforts have impressed me, particularly in cutting costs and refocusing on lower-risk business. But no matter how lean the bank might have become, the UK base rate is still only 2.5%. There’s very little margin for lending profits there.
Still, the rate did rise in December, from 0.1%, which is a start. Consumer Prices Index inflation hit 5.1% in November 2021, up from 4.2% in October. That’s largely an inevitable consequence of our bounce back after the pandemic-driven economic slump. But it does put upwards pressure on interest rates.
Economy stronger than pre-pandemic
In November, UK economic output exceeded pre-pandemic levels for the first time since the crisis began. As I see it, the economy should be back to traditional patterns before much longer. That includes sustainable economic growth, heading towards traditional inflation levels, and with commensurate interest rates.
If lending volumes increase, and rising base rates provide better margin opportunities, I reckon Lloyds’ income should get a nice boost.
And then there are dividends. My investment in Lloyds looks terrible purely on a share price basis. But my dividends have taken a take a lot of the sting out of it.
The payout was suspended in the crash, but only by demand from the PRA. The bank itself had no say in it. And dividends are already back. They’re admittedly low right now, but progressive, and I don’t think it will be too long before they reach attractive levels again.
Lloyds share price valuation
What about the Lloyds share price valuation? At the halfway stage, the bank reported earnings of 5.1p per share. Should that be repeated in the second half, we’d be looking at a price-to-earnings multiple of only around 5.5. I think that’s way too low. But doubling the share price would take it to 11, which I see as too optimistic right now.
And, of course, even if interest rates do rise, they could still remain low by historical standards for a few more years yet. So there’s clearly still some dangerous downside potential here.
On balance, I doubt Lloyds shares will double this year. But I’d be happy enough to see them get halfway there, which I think is a possibility. Lloyds is still risky, but it’s a risk I’m happy to take.