The Lloyds (LSE:LLOY) share price has climbed nearly 200% over the past five years. Admittedly the starting point was the pandemic. However, for investors, this rebound is a testament to how strongly the company and the sector overall have recovered after a long and difficult period for UK banks.
The question now is whether this momentum can be maintained into the next five years. This depends on why Lloyds shares have recovered so sharply, what’s moving the shares today, and the challenges and opportunities ahead.
Things just got better
Lloyds’s recent resurgence is mainly down to stronger earnings, reduced credit risk, and a re-rating of UK banks by investors. The company has consistently delivered improved earnings, with its latest underlying figures showing more solid growth in net interest income and cost discipline.
Unlike the dark predictions made during the post-pandemic period and the height of the cost-of-living crisis, bad loan charges have remained under control, mainly because mass defaults among consumers and businesses have not materialised.
With defaults in check, investors have been able to focus on the bank’s stable cash flows and attractive dividend. Meanwhile, the entire UK banking sector has been re-rated. Investors are now more willing to pay higher price-to-earnings ratios as fears over financial stability and the impact of Brexit have faded.
Fresh momentum
A big catalyst recently has been some much-needed legal clarity around the car finance mis-selling scandal. This case had cast a shadow over Lloyds and its rivals. The Supreme Court sided mostly with the lenders, reducing the threat of massive compensation payouts.
Lloyds has already set aside over a billion pounds for possible claims, but the judgement removed a lot of the market’s uncertainty. That’s given brokers and shareholders reason to become more optimistic about the stock’s outlook.
It’s not going up another 200%
Looking ahead, however, things could get a litter trickier. Bank shares like Lloyds tend to move in step with the economy, and the UK’s economic outlook is mixed at best. Growth is poor and the confidence in our economic leaders is deteriorating.
However, interest rates remain supportive. Lloyds’s huge deposit base and simple lending model should help margins stay resilient for a while. The bank has also benefitted as it unwinds the financial hedges put in place in the era of ultra-low rates.
While risks remain, Lloyds’s foray into being a residential landlord, via its Lloyds Living brand, is a bold new venture. It comes with its own uncertainties and will take years to prove itself. However, it’s certainly worth keeping an eye on. It already has a portfolio of over 6,000 homes.
So, after such a dramatic recovery, Lloyds shares may not see another 200% rise soon. However, legal clouds have lifted, earnings are strong, and there are some new growth drivers. I believe it’s worth considering as a long-term investment. I’m continuing to hold my shares, with the expectation of modest gains.
