If I’d invested in Lloyds Banking Group (LSE:LLOY) a year ago, my gain/loss would be £0. Lloyds shares are trading at the same price as a year ago. However, during the period, I could have sold at levels above 55p, or bought around 38p.
The price of 50p would represent a 10% move higher from the current price. When considering what could allow the stock to reach that psychologically significant value before the end of the year, here are a few reasons that are key.
More interest rate hikes
Banks benefit from higher interest rates. That’s a good thing, given that the Bank of England is expected to raise interest rates again by 0.5% at the next meeting. I think the base rate could be at 3% by the end of this year, something that would help Lloyds’ profitability.
This is related to the net interest margin. It measures the spread between the rate charged on loans versus the rate it pays on deposits. The higher the base rate, the larger this spread (and revenue) can be.
Income investors getting interested
Over the course of the pandemic, many income investors stayed away from buying Lloyds shares. The regulator asked the business to stop paying out dividends for a period. Yet things have changed now, and the interim dividend of 0.8p is an increase year on year.
With a current dividend yield of 4.4%, it sits above the FTSE 100 average. It has the scope to increase further if performance is as forecast. This should see share price appreciation as more people buy.
Value hunters stepping in
Aside from those concerned about dividends, I think the share price could lift as people spot the bank as good value. The price-to-earnings ratio is 5.79, with the FTSE 100 average more than double this. The price-to-book ratio is also below 1, which also makes me think the stock is undervalued.
I’m not the only one who can see and interpret these ratios. As a result, the share price could tick higher as more value investors see that the bank could be worth snapping up.
UK Government support
The new PM, Liz Truss, has vowed to unveil new policies to tackle energy costs and personal taxation. Although we’ll see in coming weeks what the details are, there’s chatter about freezing energy bills and cutting the different tax bands.
Given that Lloyds is primarily a retail bank, such measures would be a large positive. They could mean clients feel more comfortable about spending, as well as more confident in applying for mortgages.
There are still risks
I think all of the above reasons are enough to warrant a 10% jump by year-end for the bank. However, I do acknowledge risks to my view. A recession will inevitably lead to higher unemployment, which could trigger loan defaults for Lloyds.
It’s also less diversified in its client base and in geographical regions than other financial stocks, such as HSBC and Barclays.
I don’t see either risk as being large enough to discount my positive view, so am considering buying the stock now.
