At the end of 2019, the Lloyds (LSE: LLOY) share price was above 60p. However, due to the pandemic, the bank halved in value the following year, falling to lows of around 23p in September 2020 as investors worried about its prospects in a Covid-hit economy.
Yet its business performance since then has been encouraging. In 2021, it reported a very healthy profit after tax of £5.9bn, significantly higher than the £1.2bn reported in 2020. This led to the Lloyds share price more-than-doubling from its pandemic lows, and it’s currently around 45p. This is still lower than its pre-pandemic levels, and down around 8% in the past year. So, will it be able to soar back to 60p, or will it struggle in the current economic environment instead?
Recent performance
Lloyds reported a very strong set of 2021 results. Indeed, alongside the excellent profits, the bank was able to improve its financial position. This included boosting the CET1 ratio (which measures the bank’s financial stability) from 16.2% to 17.3%. At the same time, it delivered excellent shareholder returns. For instance, it increased its dividend per share to 2p, up from just 0.57p the previous year. At the current Lloyds share price, this equates to a dividend yield of nearly 5%, far higher than many other FTSE 100 shares. And it returned £2bn to shareholders through a share buyback programme.
The recent Q1 results were also very strong. For instance, net income was able to rise 12% year-on-year to over £4bn, up from around £3.6bn the year before. Lloyds was also able to increase its loan book by £3.2bn, while the mortgage book rose another £1.7bn. This is a sign that the business is still experiencing growth.
What about the future?
There are several short-term risks for the group. Firstly, there are signs that the housing market is slowing. As Lloyds is heavily involved in the mortgage business, a drop in house buyer activity is very bad news, as it could lead to a declining mortgage book.
Secondly, the UK economy is very fragile now, especially considering the soaring cost of living. This may result in more loan defaults and large impairment charges for the firm. This differs from last year, when Lloyds’ profits were aided by a £1.2bn impairment gain. Consequently, it’s likely to report a slight drop in profits in 2022, a factor that could see the Lloyds share price drop.
However, Lloyds may offer a good solution in the current macroeconomic environment, which is one of the main issues affecting my portfolio right now. This is because higher interest margins can increase lending profit margins.
So could it really hit 60p?
Currently, Lloyds trades at a price-to-earnings ratio of around six. This is far lower than many other bank stocks. For example, HSBC trades at a P/E ratio of 12 and NatWest trades at a P/E ratio of over 8. This indicates that Lloyds may be underpriced compared to its competitors. Further, if Lloyds managed to reach 60p, this would give the firm a P/E ratio of 8. Compared to competitors, this seems reasonable. Therefore, a target of 60p seems a reasonable goal, although I know such a rise isn’t guaranteed. Nonetheless, I may add some Lloyds shares to my portfolio.
