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What’s next for the Lloyds share price?

A brochure showing some of Lloyds Banking Group's major brands
Image: Lloyds Banking Group

Since dropping significantly in the stock market crash last year, the Lloyds (LSE: LLOY) share price has recovered strongly. In fact, it is currently priced at 43p, an 85% increase from its lows in September last year. As such, can the Lloyds share price return to pre-pandemic prices, or has it already reached its peak.

Trading update

Like a large number of bank stocks, Lloyds’ latest trading update was very positive. Indeed, in the first half of 2021, it was able to generate underlying profits of £4bn, in comparison to a loss of £281m in the same period last year. Such a profit was partially due to the reversal of £333m of impairments taken to cover potential loan defaults last year. This demonstrates the excellent recovery made by Lloyds, against the backdrop of the strong economic recovery in the UK.

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These strong results also allowed the company to pay an interim dividend of 0.67p per share. This interim dividend alone equates to an annual yield of 1.5%. The annual dividend yield is estimated to be around 4.5%, which is high in comparison to many other FTSE 100 stocks. It also seems well-covered by profits. Accordingly, I believe that there is scope for this dividend to rise over the next few years, which will hopefully be accompanied by gains in the Lloyds share price.

Lloyds was also able to enhance its predictions for the full year. Indeed, its net interest margin, which measures profitability of the core lending business, is now expected to reach 2.5%. This is compared to a previous target of 2.45%. Hopefully, this will convert into large profits for the full year.

Diversification

Unlike Barclays, which has a strong investment bank, and HSBC, which has a large presence in Asia, it can be said that Lloyds is not overly diversified. In fact, it works solely in the UK, and generates the majority of its lending profits from mortgages. This has led to plans for Lloyds to become a large UK landlord, aiming to buy 50,000 homes over the next decade. This will take place under the new Citra Living brand.

On the face of it, this sounds like an excellent idea. In fact, it is estimated that it can make £300m of profits from the first 10,000 homes, expected by 2025. But I do have my concerns. House prices are very high at the moment, and with the stamp duty holiday drawing to a close, alongside the potential that interest rates will rise, I do fear a pullback. This would likely have a negative effect on the Lloyds share price, due to its ever-growing presence in the UK housing market. This is a risk to take into account.

Has the Lloyds share price got further to rise?

Clearly, Lloyds will still face headwinds over the next few years, and gains are certainly not guaranteed. Nonetheless, its current results have shown the bank’s excellent recovery. Profits are also broadly in line with what they were before the pandemic. Consequently, I feel the Lloyds share price has got upside potential, and may be able to return to pre-pandemic levels. This is provided the UK economy does not start to deteriorate. Accordingly, I’m tempted to add some shares to my own portfolio. 

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Stuart Blair owns shares in Barclays. The Motley Fool UK has recommended Barclays, HSBC Holdings, 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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