I feel confident that Lloyds (LSE: LLOY) shares will perform in the coming years. I bought into Lloyds recently. However, I didn’t buy in just because its a blue-chip stock offering a 4.3% dividend yield. I believe that this stock has got a lot of growth potential and will continue to benefit from a strong property market coupled with higher interest rates.
As I write, Lloyds is trading at around 45p a share. That’s considerably down on its pre-pandemic price and massively down on where it was a decade ago. But Lloyds remains the UK’s largest mortgage lender and recently reported a bumper year. The bank currently has a price-to-earnings ratios of 6.26. For me, that’s cheap, especially for a blue-chip stock.
Long-term demand for property
As the country’s largest mortgage lender, Lloyds should be well positioned to benefit from ongoing property demand. Considered unsustainable by some in 2021, the increase in house prices has continued in 2020. In a recent update, the Office for National Statistics (ONS) released its UK House Price Index for February. Data showed that UK average house prices increased by 10.9% over the year to February, up from 10.2% in January. Average prices had settled at £277,000 in February, £27,000 higher than the same point in 2021.
However, despite the strong growth in house prices, it’s possible that demand could fall in the short term. Experts have highlighted the possible impact of inflation and the cost of living crisis on demand for housing. Interest rate rises are also likely to dampen demand. That could hurt Lloyds.
Yet in the long run, I’m bullish on property demand and Lloyds should benefit from this. Consecutive British governments have failed to deal with a dearth of UK housing that has existed for decades.
Lloyds Bank has also decided to become a property owner. Under the brand name of Citra Living, launched last year, the banking giant wants to purchase 10,000 homes by the end of 2025, a figure that will rise to 50,000 homes in the next 10 years, according to reports.
Higher interest rates
Lloyds relies on traditional lending more than its industry peers do. As such, interest rate hikes, more of which are expected, are likely to prove a useful tailwind. Higher interest rates allow the bank to boost its margins. Its profits had already been buoyed by increased mortgage lending and further lending at higher margins could see revenues soar.
Performance
Performance over the past year has been strong too. Net income rose to £15.8bn, a 9% rise. Underlying net interest income increased to £11.1bn, a 4% rise. Profit came in at £6.9bn, that was below the £7.2bn average analyst forecast compiled by the bank. However, the figure was a remarkable turnaround from the £1.2bn profit a year earlier. The profit miss was largely a result of huge remediation charges of £1.3bn, which included an additional £600m for payouts and costs related to historic fraud at its HBOS Reading branch.
Should I buy?
I’ve already added Lloyds to my portfolio and I’m confident it will provide more than just dividend payments. I’m also encouraged by the bank’s shift towards online services. It recently announced the closure of 60 branches this summer. This could lead to long-term efficiency gains.