Back in January, Lloyds Banking Group (LSE:LLOY) stock hit highs above 54p. We’re currently well below these levels, trading at 45p.
In recent months, the landscape for the bank has changed, but I still see the potential for the Lloyds share price to make fresh 52-week highs before the end of the year. For that to happen, I feel certain things have to fall into place.
Higher rates should give higher margins
To begin with, the net interest margin needs to increase even further. This margin is the difference in the amount the bank pays out on deposits versus the rate charged on loans. In the Q1 update, the margin stood at 3.22%. In the guidance, the management team said it expects the margin to remain above 3.05%.
This seems quite conservative to me, especially with the base interest rate at 4.5%, and likely to move towards 5% later this year.
There’s a natural delay in the Bank of England (BoE) raising interest rates and a retail bank like Lloyds benefiting from a higher net interest margin. But if we get the further trading updates later in the year increasing expectations, then this should allow the share price to move towards those highs.
The main reason for this is that a higher margin generates higher revenue. If we assume costs remain controlled, this should translate into a larger profit.
Dialling back bad debt
A second key factor, in my opinion, would be the lowering of impairment charges. These are the reduction in value relating to an asset.
In the annual report, profit was hampered by higher impairment charges, which rose to £1.5bn. This mostly relates to bad debts, such as borrowers defaulting on their mortgages or other loans.
Investors are concerned that such charges could increase this year due to the cost-of-living crisis. This would directly reduce the profitability of the bank and negatively impact the share price.
On the other hand, if we saw future charges reduced, this could be a surprise benefit for the company. It would reflect a strong customer base. The added boost to financial results could be substantial enough to really lift Lloyds shares back to yearly highs.
Sentiment in the UK
Finally, I’d want to see economic data for the UK to improve. As a UK-focused bank with predominately retail clients, Lloyds is very much in the hands of the UK economy. GDP growth for the last two quarters has been +0.1%. Not a recession, but hardly inspiring!
Other data points show a similar murky picture for the economy. I feel this is reflected in the current share price.
This can be seen as a positive though. The bar is currently set low for economic expectations. If we get strong growth, retail sales and employment data out in the summer, it would be a pleasant surprise. This should help to push Lloyds shares higher from current levels.
The risk, to my view, is that all three points are subjective. A valid argument could be made for a weakening economy with higher defaults and a rush from the BoE to cut rates to protect things.
Ultimately, it’s down for each investor to take a view and then make stock picks based on that.
The post 3 things needed for the Lloyds share price to hit 52-week highs appeared first on The Motley Fool UK.
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Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.