Can Lloyds’ share price crack 40p?

Lloyds’ [LLOY] share price has rallied 33.67% this month to close at 37.2p on 23 November. This is a remarkable feat given Lloyds’ share price has spent much of the year on the ropes. 

Giving Lloyds’ share price an overdue shot of adrenaline was Pfizer [PFE] and BioNTech’s [BNTX] COVID-19 vaccine breakthrough, which has sparked hopes that the worst might be behind the UK economy. 

Lloyds’ share price is now on the verge of breaking past its average analyst price target. For traders who picked up the stock during the March slump, the question is whether to take profits now or hold on for further gains. Those thinking about picking up the stock will be wondering how much upside is left. One potential level to aim for could be the 40p mark.

Could Lloyds’ share price break 40p?

Analysts at Credit Suisse pinned a 40p price target on Lloyds’ share price in July, which would see a 7.53% upside on the current price (as of 23 November’s close). In a recent investment note, the Swiss bank reiterated its confidence in Lloyds, saying that, of all the UK banks, it had the best chance of a re-rating if a vaccine goes to market in the coming months. Credit Suisse also said Lloyds’ dividend payouts could be back on the table next year.

"Even in the absence of a vaccine, we think the blanket [dividend] ban will likely be dropped in 2021, albeit dividend payments could be delayed until mid-year so as to be informed by stress tests,” analysts at Credit Suisse wrote.

"Even in the absence of a vaccine, we think the blanket [dividend] ban will likely be dropped in 2021, albeit dividend payments could be delayed until mid-year so as to be informed by stress tests" - Credit Suisse analysts

Adding to the optimism is Bank of America analyst Rohith Chandra-Rajan, who upgraded Lloyds from Underperform to Neutral this month. In the analysis, Chandra-Rajan suggests the “substantial improvements in mortgage pricing [is] to continue”. Like Credit Suisse, Chandra-Rajan also believes the bank will be in a good position to resume dividend payments thanks to its strong capital buffers.

Analysts seem generally positive on Lloyds’ share price right now. The bank carries a 37p average price target on the Financial Times, which would represent a slight 0.54% downside on the current price (through 23 November’s close). The high target of 45.00 would see a 21% upside if hit.

A sustained break through the 37p level could have traders eyeing up the 40p mark as the next possible target. Beyond that is the mid-40p to 50p range, which would see Lloyds return to the level at which it was trading before the pandemic took hold of the markets in March. 

An uncertain outlook?

Despite Lloyds’ share price rebound, it's not all good news on Threadneedle Street. At the start of November, the bank announced that it was axing 1040 positions in back-office support roles. These follow the 865 reductions from the bank's wealth division in September. In total, Lloyds has cut 1,900 jobs since the start of the pandemic. The bank has also revived plans to close 56 branches next spring.

The job cuts are a bitter reminder that the outlook is still uncertain for the UK banking sector. Lloyds might have posted a £1bn profit in the third quarter — rebounding from a first- half loss — but notable headwinds remain. 

Chief among them is the Bank of England. GDP is not forecast to return to pre-pandemic levels until the end of 2021, putting paid to the myth of a short, sharp, V-shaped recovery. Adding to the pressure is an expected increase in job losses, which could see a spike in loan defaults, and rock any recovery in Lloyds’ share price.

In such an uncertain time, Lloyds’ business model should provide some resilience for shareholders. With a vaccine potentially rolling out next year, and the worst of the economic pressures potentially priced in, it's difficult to see the stock falling back to its March lows — although it is far from an impossibility. For the bargain hunter, Lloyds’ share price is still down 41.61% this year to date, meaning it might not be too late to jump on the current rally.

Lloyds' share price vitals, Yahoo Finance, 24 November 2020