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3 reasons why I think the Lloyds share price could smash the FTSE 100 in 2021

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The Lloyds (LSE: LLOY) share price was one of the hardest hit among FTSE 100 blue-chips in 2020. Banks are highly geared to the health of the wider economy, so the awful performance of Lloyds’ shares wasn’t a great surprise. After all, the UK suffered its worst economic contraction in centuries last year.

Is there cause for greater optimism this year? I reckon so. Indeed, I can see three reasons why the Lloyds share price could smash the FTSE 100 in 2021. First, let me briefly put the stock’s performance last year in the context of the index.

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Lloyds share price versus the FTSE 100

Lloyds’ shares ended 2020 at 36.44p. This was a whopping 41.7% below the 62.5p level at which they started the year.

The FTSE 100 also suffered an annus horribilis, but nowhere near as bad as Lloyds. Having started 2020 at 7,542.40 points, it closed on New Year’s Eve 14.3% lower at 6,460.52 points.

Lloyds could lead the FTSE 100 higher

The short-term outlook for the Lloyds share price is doubtful, simply because the short-term outlook for the economy isn’t great. Indeed, in an interview with the BBC’s Andrew Marr yesterday, Boris Johnson said Covid restrictions are “probably about to get tougher.” This is due to the fast-spreading new variant of the virus.

However, an initial study of the variant suggests it’s neither vaccine-resistant nor causes more severe disease. If so, as mass vaccination is rolled out, we can expect economic activity and business confidence to rise through 2021.

Just as stocks in the sectors most highly geared to the UK economy — like Lloyds — were hardest hit last year, so they could lead the FTSE 100 higher as economic activity begins to recover this year.

Dividends back on the agenda

It wasn’t only the performance of the Lloyds share price in 2020 that hurt investors. Dividends were suspended at the request of the Prudential Regulation Authority (PRA). The PRA warned it was “ready to consider use of our supervisory powers should your group not agree to take such action.”

There’s better news for 2021. The PRA announced last month that it’s permitting banks to “recommence some distributions should their boards choose to do so.” Dividends were a big attraction for Lloyds investors before the pandemic. A resumption of payouts should lead to rising demand for the stock among income seekers.

Lloyds share price versus net asset value

In the wake of Lloyds’ post-financial-crisis resumption of dividends, its share price reached a high of 89p in May 2015. This was 1.6 times the bank’s tangible net asset value (TNAV) per share of 55.8p.

Lloyds current share price of 36.44p is a mere 0.7 times its last reported TNAV of  52.2p. I don’t see the shares re-rating to 1.6 times TNAV in the near term. But it shows the potential for a large rise, as an economic recovery gains traction.

What am I waiting for?

For the three reasons discussed, I think it’s possible the Lloyds share price could smash the FTSE 100 in 2021. Nevertheless, the stock remains on my watchlist for the moment.

With a new chairman just installed, and a new CEO on the way, I’m keen to see if the dividend is reinstated in the full-year results on 24 February, at what level, and the policy on future payments. I’m also keen to see the new management team’s strategy for taking the bank forward in the medium term.

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G A Chester 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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