UPDATE: The Lloyds Banking Group (LSE:LLOY) share price has surged to 95.1p as of 12 November, raising questions about the sustainability of this rally. Investors are eager to know if the stock will reach the crucial 100p mark soon, marking a significant milestone since it last traded above £1 before the 2008-09 global financial crisis.
The current rally is striking, with the share price climbing 30% over the last six months, 77% over the past year, and a staggering 174% in five years. However, this growth occurs amid a challenging economic backdrop for the UK, raising concerns about the future of Lloyds’ performance.
Nearly all of Lloyds’ revenue comes from the UK, making it highly dependent on the struggling British economy, which is grappling with rising national debt and sluggish growth. The bank commands an impressive 20% share of the UK mortgage market, but recent interest rate cuts have only provided limited recovery signs in housing demand.
“The Chancellor is expected to raise taxes in this month’s budget, squeezing incomes and potentially depressing demand for new mortgages,” analysts warn.
Despite these challenges, reports suggest that Rachel Reeves has ruled out a windfall tax on UK banks, which could benefit Lloyds moving forward. Additionally, the bank appears to have mitigated risks associated with the alleged mis-selling of car finance, where it holds around 20% of the market share.
Traditionally, banks thrive in high interest rate environments, allowing them to widen the gap between loan charges and deposit rates. Lloyds has benefited from increased borrowing costs post-pandemic. However, most economists predict a decline in interest rates within the next few years, potentially impacting the bank’s bottom line.
Nevertheless, analysts remain optimistic, forecasting a rise in Lloyds’ net interest margin up to 2027. They project earnings per share (EPS) to increase from 6.3p in 2024 to 11.3p in 2027, with a dividend forecast of 4.8p per share, translating to a forward yield of 5.1%. This could attract income-focused investors.
However, some experts caution that these optimistic forecasts may be overly ambitious. A projected 52% increase in post-tax earnings from 2024 to 2027 raises red flags, especially given Lloyds’ concentrated geographic focus. A weakening UK economy could increase bad loans and limit new business opportunities, putting the bank at significant risk.
As the share price rally continues, many investors are questioning whether it can be sustained. Some analysts believe that the current valuation is stretched, suggesting that potential investors may find better opportunities elsewhere in the sector, particularly among other FTSE 100 banks.
What happens next remains crucial. Investors are advised to monitor market developments closely as the potential for a rally or a downturn looms. With financial forecasts and economic conditions continuing to shift, the future of Lloyds’ share price remains uncertain.
Stay tuned for ongoing updates as this situation develops, and consider your investment options carefully in light of these trends.
