Despite jumping almost 19% over the past month, Lloyds Banking Group (LSE:LLOY) shares are still way off the highs of the past year of around 56p. The share price is down 8% in the past 12 months. Even with 2023 bringing many of the same themes from last year for banking stocks, there are some developments that could allow the Lloyds share price to move higher and trade back to 56p.
Higher net interest income
First up is the interest rate policy from the Bank of England. The sharp rise in the rate last year certainly helped to lift Lloyds shares in H2. Most analysts are forecasting that we’ll reach the peak rate in late spring, at around 4.5%. Yet I don’t see this as a negative for Lloyds.
Even if the central bank finishes the hikes, it’s unlikely that we’re going to see material rate cuts this year. So the base rate will remain elevated for some time (until inflation really falls). This allows Lloyds to benefit from the high rate for a long period of time.
With this interest rate, Lloyds should have higher net interest income. The bank is already benefiting from this, with Q3 results for the latest nine months including a 15% jump in this income. Yet the net interest margin was 2.98% in Q3, so has room to move higher, closer to the base rate.
If the income jumps by another 15% this year, I’d expect the share price to mirror most of this move. As a result, from current levels, this would allow it to surpass 56p.
Boosted by economic data
Another factor that could help the stock would be strong consumer activity. Lloyds has the largest UK retail presence among the major banks, so its fate is tied to the person on the street.
An encouraging sign to this end is the latest data out from the Rightmove house price index. This showed that prices jumped by 0.9% this month, breaking the fall seen in late 2022. If we continue to see the property market recover, it aids the bank from mortgage fees and lower default risk.
I’ll also be focusing on retail sales data. The December figure is due out this Friday. Given the positive trading reports from retailers such as Next and JD Sports, I think the data could beat expectations. If people are spending more, it’s good for the bank via transactional activity.
If we see activity get back to levels before the cost-of-living crisis hit last year, I feel Lloyds shares should be back at those historic levels too. In which case, 56p is a valid forecast.
Risk and reward with the Lloyds share price
There are risks to my view. If inflation starts to fall rapidly later this year, the Bank of England might respond by cutting interest rates fast. Stagflation is also a potential worrying development. The move in house prices could be a blip, with a resumption of a downward spiral in the property market.
We’ll have to wait and see, but I feel that the reward versus the risk is looking attractive. I’m putting the company on my watchlist and if the stock performs well in coming weeks, I’ll look to buy.
