2021 was a good year for Lloyds Bank (LSE: LLOY) shares. The share price rose by 37% during the year. And the party continues for the FTSE 100 stock in 2022 as well. The Lloyds Bank share price rose above 50p in early January, and it has stayed above these levels since. I think the best is yet to come for the stock, though.
High inflation leads to rising interest rates
My biggest reason right now for believing so is inflation. Inflation is already quite high, and is poised to rise even higher in the next few months. This has many implications for the macro-economy and relatedly for banking stocks, both good and bad. But the most obvious impact for now is a positive.
I am talking about interest rates. Just last month, the Bank of England decided to hike policy interest rates just as inflation came in above 5%. While they are still near all-time lows, interest rates are widely expected to rise steadily through the year. It is no coincidence that soon after the UK’s central bank increased interest rates that FTSE 100 banking stocks rallied. Interest rates are the price any commercial bank charges for its key products, which are loans. If prices are likely to rise, banks’ profits could rise too as long as demand stays strong.
Lloyds Bank share price could benefit from growth
I have to factor in the possibility that it would not, of course. Home loan demand in particular could slow down this year. Fiscal support to the housing sector provided during the pandemic is all but over. And if interest rates rise too, there is less incentive for home buyers to take on loans. In fact, high inflation could slow growth so much in the economy that banks actually slump as a result.
On the other hand, I think it might just be premature to believe that overall credit growth will slow down. There is little proof that there would be any dramatic decline in mortgage demand. House prices, for instance, continue to be strong despite the fact that the real estate market is likely to cool off this year. The recovery is also in process, which could bode well for loan demand too.
Better dividends likely
I am also optimistic about Lloyds Bank’s dividends in 2022. According to analysts’ estimates from multiple sources, dividends are expected to rise for the bank this year. At the current share price, in my estimation, this would bring its dividend yield up to at least 4.5%, up from the present 2.3%. This in itself would make it more attractive, in my view. I think one of the reasons that the stock is still trading below pre-pandemic levels is its relatively low dividends.
In sum, it appears to me that there is more good news in store for the Lloyds Bank stock in 2022 than there is bad. While I am watching out for the risks as they develop, I do believe that this is a good time for me to buy the stock.
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Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. 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.
