Could Lloyds’ share price beat the FTSE 100 in 2021?

Lloyds’ [LLOY] share price was decimated last year. Having started 2020 at 63.20p, it closed the year at 36.44p — a huge 42.2% drop and much worse than the wider FTSE 100's 13.35% decline. 

Yet in the last three months of 2020, Lloyds’ share price gained 38.27%. Spurring this on were hopes that a coronavirus vaccine would see life return to some kind of normality. The end of 2020 also saw a trade deal between the EU and UK, mitigating the economic consequences of leaving the single market.

While this year hasn’t had the best of starts, with the UK entering its third national lockdown, Lloyds’ share price has proven resilient, dropping just 3.4% so far this week to trade at 35.21p at Tuesday’s close. 

Can Lloyds’ share price rally from last year continue, or are there further falls to come? We consider the factors at play and ask whether the bank could even outperform the wider FTSE 100 this year.

Why Lloyds’ share price could beat the FTSE 100 in 2021

For those willing to back the UK economy, it could pay to consider shares in a UK bank, even with interest rates at historic lows. Nicholas Hyett, equity analyst at Hargreaves Lansdown, has claimed it could pay to consider a bank if investors are willing to back the UK’s economic recovery. He said this despite the historic lows interest rates have fallen to, pointing out that banks like Lloyds are "classic economic bellwethers". 

"Lloyds’ total revenue comes from non-interest sources – things like overdraft fees, insurance sales and (crucially) wealth management. The group has big plans to build out its wealth business through a partnership with Schroder’s. Revenues like these aren’t as exposed to interest rate pressures," Hyett told inews.co.uk.

"Lloyds’ total revenue comes from non-interest sources ... The group has big plans to build out its wealth business through a partnership with Schroder’s. Revenues like these aren’t as exposed to interest rate pressures" - Nicholas Hyett, equity analsyt at Hargreaves Lansdown

Should Lloyds build out its wealth management business, the bank will benefit from a diversified income stream in 2021 — a welcome change for many, as the bank is often criticised for its mono-focus on high street banking. Also on the horizon is HSBC’s [HSBA] Charlie Nunn taking over from outgoing Lloyds’ CEO António Horta-Osório, with hopes that fresh blood could reinvigorate the Lloyds’ long-term growth prospects.

Headwinds facing Lloyds’ share price

There is a very real possibility, of course, that Lloyds’ share price will underperform the FTSE 100 instead. If the UK economy fails to recover, then the UK bank could remain suppressed.

According to a survey of almost 100 analysts conducted by the Financial Times, the UK economic recovery is likely to be slower than other major economies, with a return to pre-pandemic levels occurring in the third quarter of 2022. That comes despite a boost in consumer spending and the emergence of a vaccine.

"We expect a prolonged recovery that takes until the end of 2023 or longer before UK output regains its pre-crisis peak," George Buckley, chief UK economist at Nomura, told the FT.

"We expect a prolonged recovery that takes until the end of 2023 or longer before UK output regains its pre-crisis peak" - George Buckley, chieft UK economist at Nomura

Factors that will affect Lloyds’ share price include the vaccine rollout and the performance of the housing market. Any further squeeze on interest rates will also put pressure on margins.

Perhaps the biggest unknown, however, is the end of the government-backed furlough scheme. This could see a spike in bad debt as customers and businesses struggle to repay the banks. Lloyds has already set aside substantial amounts of cash for this eventuality. How much more it needs will have a direct impact on Lloyds’ share price, making this a must-watch metric when the bank next updates the market on 24 February.

Where will Lloyds’ share price and the FTSE 100 end 2021?

Unsurprisingly, at the very outset of the year and with so much uncertainty in the market, there are not many analysts willing to put a number on where the FTSE 100 or Lloyds will end 2021. 

Nick Nelson and his team of analysts at UBS Group predict that the FTSE 100 will close at 7,200 come the end of December, an 11.5% gain year on year.

“A trade deal gives us more confidence in our bullish view on U.K. equities. This removes one of the downside risks to our outlook for European equities,” wrote the UBS analysts in an investor note.

Investment house AJ Bell is aiming even higher than UBS, suggesting the FTSE 100 will hit the 7,500 level by the end of the year, which would represent a 16.9% gain.

What about Lloyds’ share price, which is still down over 40% year on year? Well, Russ Mould, investment director at AJ Bell, reckons that UK bank stocks “probably deserve to be” discounted right now but, "if the markets sniff an economic recovery, any steepening of the yield curve in the UK or inflation, then the FTSE 100’s big five banks could have a (potentially rare) good year."

"if the markets sniff an economic recovery ... then the FTSE 100’s big five banks could have a (potentially rare) good year" - Russ Mould, investment director at AJ Bell

The consensus amongst analysts seems to be that Lloyds’ share price is likely to gain in 2021. The stock carries an average 40p price target on the Financial Times, which would see a 13.6% gain on its price through 5 January’s close. The most optimistic price target currently on the FT is 45p — a 27.8% increase.

Whether Lloyds’ share price will hit these targets, and whether it will be enough to outpace the FTSE 100, remains to be seen in what’s already shaping up to be another unpredictable year.

Lloyds' share price vitals, Yahoo Finance, 6 January 2020