Making predictions about the Lloyds (LSE:LLOY) share price is difficult. The profits of banks are sensitive to the wider economy meaning their earnings can fluctuate significantly from one period to another.
As a shareholder of the bank I know how frustrating its share price performance has been over the past five years. Since May 2019, it’s fallen by 10%.
But more recently it’s staged something of a comeback. And this raises a key question: can it continue?
Looking to the future
In my opinion, I think the bank will do well over the next two or three years.
I believe we’re now entering a period of economic stability after years of turmoil following Brexit, the pandemic and Russia’s invasion of Ukraine. UK GDP is expected to grow modestly this year and inflation is starting to come down. Lloyds generates nearly all of its income in Britain, making it a good barometer for the domestic economy.
But that also makes it heavily reliant on the performance of an economy that has deep-seated issues associated with poor productivity and a lack of investment.
The Bank of England is also expected to start cutting the base rate soon.
It’s sometimes tricky assessing how interest rates will affect a bank’s performance. Interest income will fall as a result of a declining margin. But the risk of bad debts should recede.
With over £450bn of interest-earning assets on its books, a 10 basis point reduction in its margin will lose it approximately £450m in revenue. However, those on variable rate loans will see their repayments fall, reducing the possibility of defaults.
The impact of defaults was particularly severe during the third quarter of 2022, when the bank booked a charge (cost) of £668m in its accounts to cover the possibility of bad loans.
As I believe we’re now entering calmer waters, I’m expecting these provisions to be reversed resulting in a credit (income) being recorded in the bank’s accounts.
Overall, I therefore expect the firm to be a net beneficiary of slightly lower interest rates.
What do others think?
And the analysts appear to agree.
For the year ending 31 December 2024 (FY24), they’re forecasting profit after tax of £4.16bn.
With a current market cap of £34.2bn, it means Lloyds trades on a multiple of 8.2 times expected earnings. The average for the FTSE 100 is around 10.5, so the shares look cheap using this measure.
The same ‘experts’ are forecasting earnings of £4.8bn in FY25 and £5.47bn in FY26.
If their predictions come true, and the same earnings multiple is applied, the bank’s market cap could be £44.9bn, by the end of 2026.
That would imply a share price of 71p, a 31% premium to its closing price on 10 May 2024.
I believe this is a realistic prospect. But I could be wrong as Lloyds has frequently disappointed shareholders.
Passive income
But I hold shares in the bank primarily for the dividend income that the stock generates. In FY23, it paid 2.76p a share. Analysts are expecting this to rise over the next three years – 3p (FY24), 3.37p (FY25) and 3.81p (FY26).
Of course, dividends are never guaranteed.
But it’s this combination of potential capital growth and the possibility of earning healthy dividends that make me want to keep hold of my shares.
