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Will the Barclays and Lloyds share prices recover in 2021?

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The share price of both Barclays (LSE:BARC) and Lloyds (LSE:LLOY) have had a pretty rough time since the start of the pandemic. Both bank stocks saw their prices basically halving as the UK entered the first lockdown. And there’s been a slow recovery since.

But since the start of 2021, the share prices of both businesses have been back on the rise. Barclays is up by 16% (and over 50% from this time last year), while Lloyds is ahead by more than 30% (and almost 59% year-on-year). What’s behind this growth? And should I be considering these bank stocks for my portfolio? Let’s take a look.

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The rising Barclays and Lloyds share prices

Like most consumer banks, Barclays and Lloyds generate a large portion of their income by lending money to businesses. These loans provide vital funding for their customers, and in return, the banks receive an interest fee that grows with the loan size.

However, when a pandemic forces the economy to shut down, that doesn’t exactly create the ideal lending environment. To make matters worse, the Bank of England increased the minimum liquidity requirements for most banks, including Barclays and Lloyds, to ensure enough cash was available for those who needed to draw from their savings. As part of these new rules, dividends for both bank stocks were outright banned.

With that in mind, the Barclays and Lloyds share prices collapsing is understandable to me. However, thanks to the relatively rapid rollout of the vaccine, the UK economy is reopening. And consequently, the restrictions imposed by the Bank of England have started to ease. Now that dividend yields are returning to historical levels, Barclays and Lloyds may also return to investors’ income portfolios, pushing their share prices higher in the process.

Nothing is certain

As promising as this recovery potential seems, the journey may take longer than expected. The performance of these bank stocks is largely tied with the performance of the UK economy. And currently, the latter is under question from investors.

Lockdown restrictions in the UK have now ended. However, as a consequence, the rate of infections is near its all-time high. Suppose the UK government decide that the country has to once again enter another lockdown. In that case, the lending rate for both Barclays and Lloyds could once again fall, taking their share prices with it.

The Barclays share price and Lloyds share price have their risks

What’s the verdict for these bank stocks?

Assuming that the UK economy can continue recovering at its current pace, I personally believe that the Barclays and Lloyds share prices are more than capable of achieving a near-complete recovery this year.

However, the factors deciding whether this will happen appear to be entirely out of the control of these bank stocks. This isn’t a trait I like to see when making an investment decision. Therefore, despite their potential, I’m keeping both businesses on my watchlist for now.

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Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays and 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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