Let me just start out by saying that the Lloyds Bank (LSE: LLOY) share price has been at penny stock levels for a very long time. And by a very long time, I mean since a little after the financial crisis of the late-2000s. But just because it has not broken out of these levels in quite a while, does not mean it cannot rally now.
Bullish forecasts for the Lloyds share price
Indeed, the most bullish analysts believe so. I just looked at the Financial Times’ compilation of forecasters’ share price targets. At least one of them, if not more, believes that in the next 12 months the stock will rise to 100p. In other words, it will cease to be a penny stock, which is defined as one at sub-100p levels.
In fact, in a recent article I myself made a case for a potential doubling in the Lloyds share price based on three arguments. One, the house price boom continues in the UK. Lloyds Bank is the biggest mortgage lender, and could benefit from that.
Robust results
Two, interest rates are on the rise, which is likely to improve the banks’ margins. The two arguments put together say that not only are lending volumes likely to be robust, the price charged for loans will be elevated too.
It is little wonder then, that the bank reported better-than-expected income in the first quarter of 2022, since the time I wrote the article. And it even expects its net interest margin to rise by 10 basis points (bps) this year to 270 bps.
Low valuations
My third argument was based on the bank’s ongoing abysmal valuations. At a price-to-earnings (P/E) ratio of six times, it is way below the FTSE 100 P/E of around 15 times. I can buy the argument that banks typically trade at earnings ratios below that for the FTSE 100. Even then, the Lloyds share price appears undervalued, however. Its P/E is still lower than the other UK-focused bank Natwest or even the more Asia-focused HSBC, which are both valued at almost 10 times.
I have to point out here, that Natwest has reported a really robust set of numbers recently, which makes a case for it. But it did flip into a loss in 2020, which makes it a riskier bet for me at a time when the pandemic is not truly out of the way. The same was not true for Lloyds Bank. Also, HSBC is probably riskier too, given its focus on China, which is facing its own set of issues.
What I’d do about Lloyds Bank
What I am trying to underline here is that there is clear potential for the Lloyds share price to rise from here. There are risks to the stock too, though. The threat of stagflation is on the rise, which means rising prices and little or no growth. This is bad for all sectors, especially for economy-linked ones like banks.
On the whole, though, I am bullish on Lloyds Bank. Which is why it is already in my investment portfolio. Whether or not it rises to 100p or not.
