Why Lloyds shares could soar in value

Lloyds shares are more than just a good passive income source. This blue-chip stock could soar in the coming years.

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LLoyds (LSE:LLOY) shares have bounced up and down in 2022 as a host of factors weighed on its price. This FTSE 100 banking heavyweight can be bought for less than 50p a share, but doesn’t carry the same risks as other penny stocks. For one, there’s no huge difference between the prices an investor can buy and sell at. Penny stocks, particularly at the lower end, tend to be smaller companies and are thinly traded. As a result, they can be swayed by larger trades. But that doesn’t happen with this banking giant.

Currently trading at 45p a share, I’m backing this stock to soar in value in the coming years. Here’s why.

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Undervalued

With a price-to-earnings (P/E) ratio of just 6.1, Lloyds looks cheap to me. This is not the P/E ratio I’d expect for a firm that has a positive future ahead. But I feel that Lloyds could go from strength to strength.

Business tailwinds

Lloyds is the UK’s largest mortgage lender and should be well positioned to benefit from property demand. There are a number of reasons for this. First among them is long-term demand. House price inflation underlines how demand has outstripped supply over the past year. Data from the Office for National Statistics showed that average UK house prices increased by 10.9% over the year to February, up from 10.2% in January. This is a longer-term trend too. And moving into the future, I don’t see demand falling. Successive governments have failed to address housing shortages in the UK.

In the short run, there could be a fall in demand and in house prices. Inflation, the cost of living crisis and higher interests rates would be the reason for this. However, higher interest rates also mean higher margins for Lloyds. Its profits had already been buoyed by increased mortgage lending, and further lending at higher margins could see revenues soar. So yes, short-term volatility, characterised by higher interest rates and possibly lower demand, may hurt the business. But there could be some benefits there too.

I’m particularly interested in Lloyds’ decision to become a property owner. Under the brand name of Citra Living, launched last year, Lloyds wants to purchase 10,000 homes by the end of 2025. The figure that will rise to 50,000 homes in the next 10 years, according to reports. 

Positive recent performance

Earlier this week, Lloyds posted better than expected profits for the first quarter. The lender reported pre-tax profits of £1.6bn, down from £1.9bn a year ago, but beating average forecasts of £1.4bn. The result followed a strong performance in 2021. Net income rose to £15.8bn, a 9% hike. Underlying net interest income increased to £11.1bn, a 4% rise. Profit came in at £6.9bn, but that was below the £7.2bn average analyst forecast compiled by the bank.

Should I buy?

While I’m bullish on this stock, there are risks. It warned of an uncertain economic outlook amid rising inflation and the cost of living crisis in its Wednesday update. A recession could lead to defaults on borrowing, which wouldn’t be good news.

Despite this, I’ve already bought Lloyds and will buy more. I’m also happy to see the bank closing 60 branches this summer. Awful though this is for employees and some customers, it could enhance efficiency in the long run.

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James Fox owns shares in Lloyds Banking Group. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Should you invest the value of your investment may rise or fall and your Capital is at Risk. Before investing your individual circumstances should be considered, so you should consider taking independent financial advice.

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