Lloyds (LSE:LLOY) shares have bounced up and down all year. The volatility stems from several economic challenges being faced in the UK, including soaring inflation and the cost of living crisis. But there are upsides too. Lloyds, as the UK’s largest mortgage lender, has benefited from a booming housing market while higher interest rates mean higher margins. As such, some forecasters have suggested the Lloyds share price will soar this year. Personally, I don’t see it breaking the £1 barrier that some have predicted — it hasn’t been there since the financial crash — but I am backing the stock to grow significantly. Here’s why!
It’s already looking cheap
For starters, based on the previous year’s figures, Lloyds has a price-to-earnings (P/E) ratio of just 5.8. That’s very low, especially for a firm that I believe has good long-term growth potential. Brokers have set price targets considerably in excess of the 43p the stock is currently trading at. Morgan Stanley recently held its price target at 62p.
Positive recent performance
The banking giant published its Q1 report in late April and beat expectations. The lender reported pre-tax profits of £1.6bn, beating the average forecast of £1.4bn. However, the figure was down from £1.9bn a year ago. It attributed the year-on-year fall to a £177m charge that should protect it against inflation-induced defaults. Inflation is currently at levels not seen in decades, posing a threat to credit repayments.
Results from 2021 were pretty positive too. Pre-tax profit fell just short of analysts’ forecasts at £6.9bn. However, net income rose to £15.8bn, representing a 9% increase. Underlying net interest income increased to £11.1bn, a 4% rise.
Strong future prospects
Mortgages account for 71% of Lloyds’ loans. As such, it’s heavily exposed to the UK property market. For me, that’s not a bad thing. I think long-term demand for homes will remain strong, primarily because successive governments have failed to address an imbalance between supply and demand.
In addition to this, I’m interested by Lloyds’ plan to become a property owner. Through the brand Citra Living, the lender intends to buy 10,000 homes by 2025 and 50,000 homes by 2050, according to reports. There’s good margins to be had in property, especially if you’re buying in bulk. In 2021, Citra Living signed a strategic agreement with housebuilder Barratt Developments and I’m pretty sure it’s getting a better deal than I would!
The Bank of England opted to increase rates on Thursday, which didn’t have a good impact on the Lloyds share price. But there are a few things to bear in mind here. Firstly, higher interest rates mean bigger margins for lenders, and there are already signs that Lloyds has benefited from earlier rate rises. A 1% base rate also doesn’t mean there’s going to be demand destruction. People still need new homes and 1% isn’t hugely prohibitive. Having said that, there certainly could be some short-term pain here. The bank has also warned about inflation-induced defaults.
Should I buy?
Well, I don’t see Lloyds breaking the £1 barrier any time soon, but I am backing it to soar based on long-term demand for housing. I also like the Citra Living concept, although it might be a while before we see the outcome on the balance sheet. I’ve already bought Lloyds shares and am looking to buy more.