Lloyds’ share price [LLOY.L] has some way to go before it gets back to pre-pandemic levels. Despite profits bouncing back in 2021 - the bank’s balance sheet was up 462% in pre-tax profits last year compared to 2020 - the stock is still in recovery mode.
Not helping investor sentiment are fears that the Russian-Ukraine conflict will weigh on any post-pandemic recovery. JP Morgan recently cut estimates for Euro banks across the board in the wake of the conflict.
However, the analysts at JP Morgan also expressed a preference for Lloyds, among other Euro banks. With rising interest rates, the banking sector could see stronger bottom lines this year. So, should investors pick up a potentially high-dividend paying stock at a relatively low price?
JP Morgan backs Lloyds, UBS and Deutsche Bank
JPM Morgan slashed earnings estimates for European banks by 14% to 15 % after the war in the Ukraine broke out. The investment bank says that the Russian banking sector is relatively small compared with the EU’s with “the majority of forecast risk’ coming via an ‘economic spillover. Despite scaling back estimates, JPMorgan is still optimistic on Europe’s banking sector, singling out Lloyds, UBS and Deutsche Bank.
Over the two year period, Lloyds share price is up over 53.08% as it continues to recover from the pandemic sell-off. While the rising share price is good news for shareholders, it lags the gains made by UBS [UBSG], Barclays [BARC.L] and Deutsche Bank [DBK] over the same period. Having closed Friday 18 March at 49.14p, Lloyds is still off the 60-63p range that it was trading at between January and February 2020.
Interest rates should help the bottom line
Banks' bottom lines have suffered over the past couple of years as interest rates remained stubbornly low. 2022 will see that change as central banks hike rates to tame inflation.
The Bank of England Monetary Policy Committee voted on 17 March to increase the base rate from 0.50% to 0.75%. The Federal Reserve also increased interest rates in March. The European Central Bank won’t raise interest rates until it has completed its bond buying at the end of the third quarter, though.
Higher interest rates mean that banks can charge more for their credit services. As the UK’s biggest mortgage lender, Lloyds should benefit. German lender Commerzbank expects to see a billion-euro windfall from rising interest rates by 2024.
However, the process of hiking interest rates is a double edged sword as any increase in the cost of living may weaken demand for banking services. Russia’s invasion of Ukraine has also raised concerns that plans to hike interest rates could change as central banks weigh up the conflict’s effect on Europe’s economy. ECB president Christine Lagarde said in February that “the Russia-Ukraine war will have a material impact on economic activity and inflation.”
Lloyds's pretax profits in 2021, up from £1.3bn in 2020
Europe’s banks bounce back
2021 saw a vast improvement in the profitability of Europe’s banks. Lloyds’ pretax profits came in at £6.9bn for 2021, a sharp improvement on the £1.2bn in 2020. However, the results missed expectations as the bank was once again punished for past misdeeds with a £1.3bn remediation charge, including a £600 payout related to historic fraud at its HBOS Reading branch.
During its full year results, Lloyds upped its profitability targets in the results and now expects to make a return on tangible equity of more than 10% by 2024 and over 12% by 2026.
Boosting the results was £1.2bn earmarked for pandemic loan defaults that never materialised. Barclays similarly benefitted from a one-off release in pandemic related loans, which led to a quadrupling of profits year-over-year.
UBS delivered net profit of $7.5bn in 2021, up 14% year-on-year, and its best performance since 2006. Deutsche Bank also delivered robust performance, with net profits quadrupling to €2.5bn.
The robust earnings enabled the banks to reward faithful shareholders with dividends and buybacks. Lloyds said it would pay a dividend of 1.33p per share and buy back £2bn of its own shares. Barclays will pay a dividend of 6p per share and buy back a further £1bn shares, in addition to an already announced £500m. UBS announced $5bn in share buybacks and upped its dividend to $0.50.
Lloyds pins hopes on diversified revenue stream
In past years, Lloyds has been criticised for a lack of diversification in its revenue streams. Now under CEO Charlie Nunn, the bank is embarking on a growth strategy that will include an expansion into insurance products and wealth management. In October 2021, the lender revealed that it had £4bn in excess capital - effectively a war chest that Nunn can use to execute his strategic vision.
As the bellwether of the UK economy, Lloyds; share price performance will depend on factors outside of its control. The economy rebounded strongly after the omicron wave, with GDP up 0.8% in January. However wage growth is likely to be negative this year, according to Bank of England data. Any further damping of sentiment on the UK economy will be felt on Lloyds shares. As it stands, the bank has an average analyst price target of 59.68p, according to data from Yahoo Finance.