In this analysis, we take a look at where the Lloyd’s share price may be in five years’ time. We look at how Lloyds has performed historically in times of high interest rates, how they are profitable in a challenging market and whether Lloyds shares should be included in your long-term portfolio.
How did Lloyds Banking Group perform as interest rates topped out?
Lloyds Banking Group (LLOY) is one of the largest banking institutions in the UK. The £36 billion bank includes the Bank of Scotland, an institution founded in 1695, Halifax, a demutualised building society, Scottish Widows, the asset manager, and the high street-based Lloyds Bank.
Despite its size, the last few years were tough for the UK bank. The global covid-19 pandemic saw Lloyds’ share price crash from 70p to 25p. Then, inflation rates soared. As price levels climbed relentlessly, interest rate spiked. Lloyds Bank had to navigate through this turbulent economic landscape carefully.
But it appears that the worst is over. Interest rates are slowly stabilising due to falling inflation rates. The 12-month UK CPI rate hit the 2 percent target both in May and June. This allows the Bank of England to cut the policy rate in early August by 25 basis point, from the multi-year high of 5.25 percent. This is the first rate cut since 2020 (see below).
Source: BBC
In other words, the macroeconomic picture is ‘improving’ in 2024. Against this more benign backdrop investors are taking a more positive view of the banking sector, especially over the past six months.
During February-July, for example, Lloyds shares rebounded significantly. Prices rose from the range floor near 40p by fifty percent and registered one of the largest rallies in years. Whilst in early August a correction saw prices slump to 53p, a swift recovery erased these losses quickly. The bank is now testing the 60p level again (see below).
It appears that the more market-friendly macro environment have shifted investor’s perception of the UK large-cap stocks.
Steady profits amidst a challenging UK economy
Meanwhile, Lloyds is still one of the most profitable entities in the UK corporate market.
In the first half of the year, the bank reported a net income of £8.4 billion. Lloyd’s net interest margin – the interest income earned and paid out – remains at a decent 2.94 percent. With a group deposit amount of £475 billion, Lloyds is confident enough to increase the interim dividend by 15 percent (to 1.06 pence).
Boosted by this set of expectation-meeting results, Lloyds Group CEO, Charlie Nunn, reported that “the Group delivered robust financial results with solid income performance and cost discipline alongside strong capital generation.” A quick snapshot of Lloyd’s first-half results is shown below.
Source: Lloyds Banking Group (Jul 2024)
Featured accounts for investing in Lloyds shares
Should you buy Lloyds’ shares for the next 5 years?
About a year ago, Mr Market was utterly depressed about UK stocks. This negative sentiment, however, appears to have dissipated somewhat as investors anticipate an improvement to the British economy and the corporate results.
This can be seen from the unexpected rally in Lloyds’s share during the summer. To be fair, Barclays (BARC) also put on a dazzling rally. Its share prices soared from 140p to 230p, registering a gain of 64 percent.
I wrote about the compressed valuation of Lloyds a while back. The bank sector’s sudden price improvement validated the point that when a depressed stock reverts back to its ‘usual’ valuation, the process can happen very quickly. If you are not on board already, chances are you’d have missed a large part of the gain from the initial bullish revaluation.
Looking forward, at 60p is it still suitable to buy Lloyds?
Some may argue that after a multi-month rally, the risk of a correction has increased. Moreover, the red-hot US stock is prone to sharp drops, like the one we saw in early August. This will pull UK stock price down. Lastly, the UK may endure recessionary impact should economic growth slows.
To take these market dynamics into account, perhaps one should scale into the stock over time rather than buying all in one goal. But the obvious risk in this tactic is that Lloyds may continue to rally hard into the 70p area. By then, if you’re still out of the stock you would have missed a staggering 60 percent gain.
Lloyds have broken through a few resistance levels already (48p, 55p) and is now aiming to return to the pre-pandemic peak. Its price trend is unmistakably medium-term bullish and has momentum. Plus, Lloyds’ dividend yield remains a chunky 4.9 percent.
All these factors are stacking the odds for another leg up. To see how far a stock can rebound, just look at Marks & Spencer (MKS) or Rolls Royce (RR.).
In all, to address the important question if Lloyds is a 5-year buy, the answer is largely affirmative, although one has to be patient for results to come through.
Jackson is a core part of the editorial team at GoodMoneyGuide.com.
With over 15 years industry experience as a financial analyst, he brings a wealth of knowledge and expertise to our content and readers.
Previously Jackson was the director of Stockcube Research as Head of Investors Intelligence. This pivotal role involved providing market timing advice and research to some of the world’s largest institutions and hedge funds.
Jackson brings a huge amount of expertise in areas as diverse as global macroeconomic investment strategy, statistical backtesting, asset allocation, and cross-asset research.
Jackson has a PhD in Finance from Durham University and has authored nearly 200 articles for GoodMoneyGuide.com.
You can contact Jackson at jackson@goodmoneyguide.com
