I recently wrote about how much a £1,000 annual investment in Lloyds Banking Group (LSE:LLOY) would currently be worth. I talk in more detail about it there, but in short I’d be out of pocket several hundred pounds. This isn’t surprising, given that the Lloyds share price has been in a slow downward trend for the last four years.
But after hitting a low last September, the price has moved almost 70% higher. So is another 25% move (taking it to 50p) really out of the question?
The case for 50p
In order for the Lloyds share price to take another leg higher, I think we’d need to see strong quarterly updates later this year. These would need to build on the full-year 2020 results from last month. There were several key elements from the results that give me optimism for 2021.
Firstly, the reduction in impairments needed on the loan book. In July 2020, the bank was estimated to need to set aside £4.5bn–£5.5bn in provisions due to the pandemic. The actual year-end figure was £4.2bn. Going into 2021, if new provisions are again lower than expected, this will give investors more confidence that bad debt won’t be a big issue going forward.
Secondly, the Lloyds share price could gain thanks to the outlook for dividend payments. These were resumed with an expected dividend of 0.57p per share. If we assume a share price around 40p for when the dividend gets paid, it’s a yield of 1.4%. Nothing spectacular, but definitely a start. Lloyds used to be a popular stock for income investors. So should the yield move higher in 2021, more could buy in for this purpose.
Why Lloyds shares might struggle
The current CEO, António Horta-Osório, is handing over the reigns after a decade at the helm. This isn’t fresh news, and the market digested this months ago. However, now comes the time where the real uncertainty begins. The new CEO, Charlie Nunn, has experience with HSBC. Yet this is still a big change for Lloyds and so any teething problems this year with the changeover could spell trouble for the Lloyds share price.
Another element that I’ve mentioned before is that the outlook for interest rates isn’t positive in the UK. If anything, rates could fall from 0.1% down to 0% this year. This squeezes the net interest margin that’s the traditional way a bank makes money.
For 2020, the net interest margin fell from 2.88% to 2.52%. It might not sound much, but if it falls by a similar amount in 2021, it’s bad news for Lloyds shares. Lower margins means lower profits, unless the bank can offset this by other divisions. However, given the lack of a sizeable presence in investment banking or trading in capital markets, it looks like Lloyds will continue to rely on retail banking.
My forecast for the Lloyds share price is that it can reach 50p by the end of the year. However, I expect a lot of this move to come towards the end of the year. The bedding in period of the new CEO, and the time needed to increase the dividends, could weigh on the share price in the short term.
