Lloyds (LSE:LLOY) shares trade in pennies. But it’s not a typical penny stock — it’s neither small or thinly traded and the share price can’t be swayed by larger trades. Lloyds is a blue-chip FTSE 100 stalwart.
Today, the share price lingers around 42p. So can we ever expect to see Lloyds trading above £1 again?
Trading in pennies
Lloyds stock once traded at highs of £4-£5. That was before the financial crash of 2008. Lloyds TSB, as it was then, became Britain’s most profitable bank and a darling of the stock market in the 1990s after takeovers, cost efficiencies and massive returns for investors. But the business hasn’t traded above £1 since the crash.
Reasons for optimism
I don’t see its shares soaring above £1 any time soon, but there is one big tailwind right now. That’s interest rates.
The Bank of England (BoE) base rate has ensured near-zero interest rates over the past decade. And that’s not been positive for lenders as it means net interest margins (NIMs) — the difference between savings and lending rates — have been depressed.
But things are changing. The BoE base rate currently stands at 3% and could rise above 4% in early 2023. This allows Lloyds to charge more interest on the money it lends. It even means it earns more interest on the money it leaves with the BoE. In its Q3 update, Lloyds said it expects its NIM to be above 2.9%, up from 2.8%.
However, it’s worth noting that rapid rises in interest rates can create more problems. As has been well reported, many Britons are already struggling to afford their mortgage repayments. Equally, higher rates will (as the BoE intends) reduce demand for new business.
What’s holding Lloyds back?
Net income in Q3 rose 12% to £13bn on the back of surging interest rates. However, pre-tax profit for Q3 fell 26% to £1.5bn. Impairment charges soared to £668m from a release of £119m a year ago.
The challenge right now is that banks are having to put money aside for bad debt provisions with the economy expected to go into reverse. A large bad debt provision is hopefully not necessary, but that’s still going to impact near-term performance. It’s also one of the reasons Lloyds looks cheap with a price-to-earnings ratio of 5.9.
Can it soar beyond a £1?
It’s entirely possible that Lloyds will trade above £1 over the next decade. We appear to be entering an era where inflation is likely to remain at higher levels than the previous decade — partially caused by increased competition for resources.
As such, interest rates will likely remain higher. And greater income levels will allow Lloyds to invest in other projects — such as its plan to enter the rental market by buying 50,000 homes over the next decade.
So I’m not expecting Lloyds to soar to £1 anytime soon, but I wouldn’t be surprised to see it closer to 60p next year if the UK recession is shallow. I already own its shares, but I’m looking to buy more.
