Lloyds’ (LSE: LLOY) shares could hit 100p within six months as four key catalysts work together to drive the company’s share price higher.
Government sell-off
First off, as the government sells off its remaining stake in the lender, Lloyds’ shares should head higher as liquidity increases, a large seller leaves the market and government influence over the bank dissipates. A retail share placing to offload a significant chunk of the government’s remaining stake is expected at some point during the next few months.
Secondly, Lloyds should benefit from the UK’s improving economy. Not only will economic growth spur demand for lending but it will also push the Bank of England to begin raising interest rates.
And a higher interest rate would be great news for Lloyds as the bank’s net interest margin is linked to the Bank of England’s base rate.
Interest margin
Simply put, the net interest margin is a measure of the difference between the interest income generated by banks and the amount of interest paid out to borrowers, relative to the amount of their interest-earning assets. As a result, the wider the net interest margin, the more interest income that’s generated by banks.
With interest rates set to head higher, Lloyds’ net interest margin will grow, which will, in turn, boost the bank’s net income and City estimates for growth. An improved outlook is the third catalyst that could drive Lloyds’ shares higher. If City analysts raise their estimates for the bank’s growth, it should attract growth investors, whose buying will push up Lloyds’ share price.
The fourth and final catalyst that could help drive Lloyds’ shares up to 100p is the prospect of a cash return.
Cash return
City analysts believe that Lloyds could return £20bn to £25bn to shareholders over the next three years. However, the bank may look to accelerate this plan ahead of the introduction of the new dividend tax rules that are set to come into force during April 2016.
From next April the dividend tax credit will be abolished and will be replaced with a dividend tax allowance of £5,000 per year. Any dividends above the new £5,000 tax-free limit will be taxed. Basic-rate tax payers will pay 7.5% on dividends over the £5,000 limit. Higher-rate tax payers will pay 32.5%, and additional-rate taxpayers will pay 38.06%.
And, as Lloyds has the largest number of retail investors of any FTSE 100 company, management could seek to help investors work their way around these new tax rules by issuing a special payout this year.
A word of warning
Having said all of the above, there’s a chance that Lloyds’ shares could fall further before they push higher as it emerged this week that the Serious Fraud Office is giving “active consideration” to a request from MPs to investigate the bank.
MPs are claiming that Lloyds, along with Alder King, a firm of property valuers and receivers worked together to force small businesses into liquidation as the bank sought to clean up its balance sheet after the financial crisis.
Still, as of yet the SFO hasn’t announced a formal investigation.
