The Lloyds Banking Group (LSE:LLOY) share price has performed remarkably well, despite the weak state of the British economy. At 45.6p per share, the FTSE 100 bank is basically unchanged since the turn of 2023.
Retail banks like this have been helped by a raft of interest rate rises during the past year. Bank of England (BoE) policy has helped lift net interest margins (NIMs) across the industry, a key metric to gauge these companies’ performances.
The NIM reflects the difference between the interest earned on loans and the interest paid on savings products. While this is heading lower, it’s still possible that Lloyds’ share price will march higher in the new year.
Here are three reasons why the bank could shoot through £1 in 2024.
1. Dividends keep soaring
Shareholder payouts at the Footsie bank have rise strongly since the end of the pandemic. And signs that the company will remain on this path will surely attract even more attention from income investors.
Lloyds raised the half-year dividend 15% year on year, to 0.92p per share. A strong balance sheet could give it the platform for further meaty hikes too. Its CET1 capital ratio sat at 14.6% as of September, way ahead of its target of 12.5% plus 1% management buffer.
2. Extra buybacks
The bank’s financial robustness also means that further share repurchases could be coming. Stock buybacks mean that a company’s earnings are divided among a smaller number of shares, which, in turn, can lead to healthy share price gains.
Earlier this year, the company completed a £2bn repurchase programme that reduced the number of shares in circulation by 7%.
3. Economic outperformance
The UK economy is tipped to basically flatline in 2024 as the impact of interest rate rises weigh and labour shortages continue. S&P Global, for instance, has tipped growth of just 0.4% next year.
But Britain’s economy has performed better than most analysts expected this year. A continuation of this trend could lead to earnings upgrades for cyclical banks that pull their share prices higher.
However…
Lloyds shareholders will be hoping these factors could help the bank ‘do a Rolls-Royce‘ next year. The aerospace giant has risen 203% in value in 2023, the sort of rise that would push Lloyds shares to £1.38 each.
But the bank will have to overcome some significant obstacles to put in this sort of performance.
As I say, NIMs have trekked lower in recent months. Margins could crumble should the BoE slash rates to support the economy. This key metric could also fall as Lloyds responds to growing competition and pressure from the Financial Conduct Authority to offer better savings rates.
At the same time, retail banks like this face a steady rise in loan impairments. It chalked up another £849m worth of bad loans in the first nine months of 2023. And the bank’s position as a major home loan provider makes it especially vulnerable to further impairments as people come off cheaper deals.
For these reasons I’m not planning to buy Lloyds shares for my portfolio. I’d rather search for other FTSE 100 stocks to buy for next year.
