Image source: Getty Images
Lloyds (LSE:LLOY) shares haven’t exactly been stellar performers over the last decade. In fact, the stock’s traded below the £1 threshold since the 2008 financial crisis and today sits close to 50p. This lack of share price growth’s been partially offset by a chunky dividend yield since 2014, which currently stands at 5.6%.
However, new analyst forecasts indicate this period of lacklustre growth may be over. In fact, some have even predicted a 50% jump in market capitalisation over the next 12 months. Does that mean now’s the perfect time to start snapping up shares? Let’s explore.
The bull case
As a retail bank, Lloyds’ performance is largely tied to the monetary policy set by the Bank of England (BoE). The most prominent exposure is interest rates. After all, the company makes money by issuing loans and collecting interest payments.
Since 2008, that’s been challenging. With the central bank rate set near 0% over this period, margins have been fairly tight for the bank. This meant that Lloyds became dependent on volume. But as one of Britain’s biggest banks, the firm had already saturated much of the market. And a lack of economic growth over the same period translated into slow volume growth as well.
Today, the situation’s very different. UK interest rates now stand at 5.25%. With Lloyds able to charge borrowers more for its services, the bank just delivered a record pre-tax profit of £7.5bn.
Management has subsequently announced a £2bn share buyback programme, as well as hiking dividends by 15%. And while the BoE’s expected to cut interest rates later this year, they’re unlikely to return to near-0% enabling Lloyds to continue expanding its bottom line for the long run.
That’s why some analyst forecasts project the Lloyds share price to reach as high as 74p within the next 12 months – that 50% jump!
Taking a step back
As exciting as this prospect sounds, it deserves a pinch of salt. Not all analysts are feeling bullish. In fact, some have predicted the complete opposite, with the bank’s market capitalisation set to remain flat for the foreseeable future. Their chief concern is the ongoing regulatory investigation into car finance commissions.
The Financial Conduct Authority (FCA) is taking a look into unfair commission practices between finance providers and brokers that led to consumers paying more than necessary. With a 35% exposure to the UK’s car finance market, Lloyds has already set aside £450m to settle claims ahead of the conclusion of this investigation.
Compared to the group’s £450bn loan book, it’s not a catastrophic revelation. However, the reputational damage could be severe. And definitely something that young fintech firms will capitalise on to steal market share.
In the short term, weak investor sentiment may prevent the banking stock from reaching its full potential. In the long run, Lloyds can continue to maintain its elevated net interest margins, but that might change.
Regardless, I feel thoughts of a 50% jump in valuation may be too optimistic, all things considered. Therefore, I’m not tempted to buy the shares today.
