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The Lloyds share price leapt 7% last week. But it could go much higher

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Last week was a good one for long-suffering shareholders of Lloyds Banking Group (LSE: LLOY). After releasing decent results, the Black Horse bank’s shares jumped. Indeed, the Lloyds share price ended the week up almost 7%. But I think this could be the start of a sustained recovery for Lloyds shares.

The Lloyds share price leaps 6.6%

On Friday, 23 April, the Lloyds share price closed at 42.63p. A week later, it closed at 45.44p. That’s a rise of 2.81p (6.6%) in a week — one of the stock’s best performances in 2021. In fact, Lloyds was the third-best performer in the FTSE 100 index last week (narrowly beaten by two other bank stocks). Also, the shares have been on a bit of a winning streak in 2020/21. Here are their gains over four recent timescales:

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1M +6.8%
3M +35.8%
6M +62.1%
1Y +40.9%

Lloyds has been a long-term loser

Hey, it’s all been sunshine and roses for Lloyds shareholders, right? Wrong! Here’s how the Lloyds share price has performed over the longer term:

2Y -27.4%
3Y -29.7%
5Y -33.3%

As you can see, the Lloyds share price has been a short-term cherry, but a long-term lemon. Indeed, it’s down exactly a third over the past half-decade. Over the same period, the FTSE 100 index is up almost a seventh (13.8%). That’s a massive underperformance by LLOY.

As one of the UK’s leading lenders, Lloyds was battered by the Covid-19 crisis. Last year, the bank set aside over £4.2bn in loan-loss reserves. This contributed heavily to after-tax profit collapsing by more than half . It was down 54% to £1.4bn in 2020, from over £3bn in 2019. Still, the Lloyds share price has come a long way from the low of 23.59p it hit on 22 September 2020. Still, any brave investors buying at this time would have almost doubled their money today.

Can the bank bounce back in 2021/22?

Happily, the bank unveiled an improved set of figures last Wednesday, when it released its first-quarter results. One bright spot was credit impairments (reserves against bad debts) at a mere £323m in Q1/21. This helped after-tax profit to reach £1.4bn for January to March. Remarkably, that is the same as in the whole of 2020. This explains the leap in the Lloyds share price last Wednesday and the impressive weekly rise.

To really thrive once more, Lloyds really needs three things. First, it needs consumers to start spending at pre-Covid-19 levels, boosting the UK economy. Second, it needs individuals and businesses to start borrowing again, instead of stashing their cash on deposit. Third, the bank needs to arrest the decline in its NIM (net interest margin; the spread it makes between savings and lending rates). If all three were to come in, then banks would hit the jackpot and I would expect the Lloyds share price to surge from here.

But what if economists and central bankers are wrong and the world doesn’t undergo a multi-year economic boom? If UK growth stutters, then unemployment could rise and bad debts creep up. Similarly, any further Bank of England rate cuts would hit Lloyds’ bottom line. Also, new Covid-19 variants could hinder the UK’s long-awaited return to normality. But I’m optimistic that mass vaccinations will eventually get us to a better place. Thus, I think the Lloyds share price still has a long way to go and I’d be happy to buy at current levels.

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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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