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Two reasons why I think the Lloyds share price will be a big winner in 2021!

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If Santa Claus had bought Lloyds Banking Group (LSE: LLOY) shares a year ago, just before Christmas 2019, would he be feeling naughty or nice today? I think he’d be feeling pretty naughty. And also fed up, like millions of other shareholders who watched the Lloyds share price plummet in 2020!

Long-lasting losses for the Lloyds share price

The Lloyds share price has been one of the FTSE 100‘s biggest losers in 2020. That’s hardly surprising, given that it’s the UK’s biggest retail bank with 30 million customers, caught in the crossfire of the Covid-19 crisis. Being a leading lender during the UK’s worst economic contraction in over 300 years has hobbled the Black Horse bank this year.

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At the current 32.99p, the Lloyds share price has crashed by almost half (47.1%) over the past 12 months. It’s also been hit hard today, down 1.91p (5.5%) on fears of a fast-spreading Covid-19 variant. Even worse, Lloyds shares have been serial disappointers for years: down 32.8% over two years, 47.7% over three, and 51.1% over half a decade. But here’s why I’m expecting a comeback in 2021.

1. This stock is temporarily depressed, not dead

At their 52-week high, Lloyds shares peaked at 64.51p on 27 December 2019. Then they plunged in the spring as the coronavirus spread worldwide. The Lloyds share price hit a closing low of 27.73p on 3 April, before staging a two-month comeback into early June. Then began a long, slow drop to a lower low of just 23.59p, hit on 22 September. Two days later, I said I saw a lifetime of value in Lloyds shares at 24.58p. They subsequently surged as high as 40.82p on 25 November, soaring almost three-quarters (73%) in just over a month.

Three months ago, I said this stock was crazily cheap. Today, I am only slightly less optimistic with the Lloyds share price hovering just below 33p. This depressed level values a leading UK bank — built up since 1695 — at just £24.7bn. If I could buy the whole of Lloyds at the current valuation and pocket all of its profits forever, I would greedily snap it up today.

2. Lloyds’ rebound will pay dividends

The long spring lockdown forced Lloyds to set aside billions of pounds to cover potential loan losses. Happily, the worst-case scenario didn’t emerge, thanks to enormous government support for workers and businesses. As a result, Lloyds bounced back in the third quarter, reporting a £1bn pre-tax profit. Also, being a ‘boring’ UK-only bank means Lloyds has a rock-solid balance sheet, stuffed with low-risk, ‘safe as houses’ mortgages. Furthermore, Lloyds has billions of excess capital waiting to absorb bad debts as we move into 2021. For me, this solidity should support and later lift the Lloyds share price next year.

Finally, share prices never rise in straight lines, so the first half of 2020 might well be a bumpy ride for Lloyds shares. But the banking regulator has already given British banks approval to resume paying cash dividends in 2021. For Lloyds, this welcome announcement could come as early as February. When Lloyds resumes rewarding shareholders in cash for their patience, I expect its shares to soar. That is why this is one of my top UK shares for next year. Hence, I’d happily buy and hold Lloyds shares in my ISA today to enjoy tax-free dividends and capital gains.

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Cliffdarcy has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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