Back in March, I wrote a piece where I stated that I thought Lloyds Banking Group (LSE:LLOY) shares could reach 50p. At the time, it was trading about 25% below this level. If we fast-forward to today, the Lloyds share price is currently trading around 48p, so almost at the target level. I will admit that my outlook was for 50p to be hit later this year, and that the move towards this level has come at a quicker pace than I expected. So what does this mean for the bank for the rest of the year?
The reasons for the rally
The movement higher in the Lloyds share price over the past couple of months has been very sharp. This can be put down to a couple of different reasons.
Firstly, first-quarter results built on the full-year results that were released in February. The full-year results were positive, with the icing on the cake being the resumption of a small dividend. Investors were keen to see whether Q1 results would continue this momentum.
In my opinion, it did. Underlying profit came in at £2.07bn, up 58% from Q4 2020. It was also considerably higher than Q1 of 2020, although given the pandemic impact I don’t judge it against this figure.
Aside from quarterly results, the rising inflation expectations have also been a benefit to the Lloyds share price. Although this has been a negative for companies with heavy debt loads, it’s been a positive for the bank’s business model.
Higher inflation should lead to higher interest rates from the Bank of England. This will filter through to the net interest margin that the bank makes. The higher the interest rates, the larger the difference between the rate the bank charges (lends) and pays (deposits).
My outlook for the Lloyds share price
I do think the rally in the Lloyds share price close to 50p has been warranted. A 25% move in three months is a lot, and it’s up 64% over one year. So I do think there will come a point when all the good news is priced in to the stock.
I don’t think we’re there yet though. For example, I think there is upside potential surrounding the future dividend payout. More information on this is due at the half-year results. If the outlook is for the bank to resume to a higher payout policy into next year, then I think the Lloyds share price could rally.
Another reason for my positive outlook is the indirect benefit the bank will get from further easing of lockdown restrictions. It’ll take time for consumer spending and business investment to properly resume. When it does, Lloyds will undoubtedly benefit as it’ll be the facilitator in these transactions.
The main risk to my view is that the above events don’t happen as quickly as I expect. Rates could be kept low for years to come, and the recovery in the economy could take longer as well. In this case, the trend higher in the Lloyds share price could stagnate.
Overall, I have enough exposure to banking stocks at the moment, but if I didn’t then I would look to buy Lloyds shares.
