So far this year, the Lloyds Banking Group (LSE:LLOY) share price has been volatile. It’s down 10% over the past week, but remains up a healthy 41% over the past year. At the moment, there are a lot of key issues that influence the Lloyds share price and will continue to do so for the rest of the year, in my opinion. Here are some that I see as a risk and some that could be of benefit.
Potential boosters for Lloyds shares
The main booster that I think could help to carry the Lloyds share price higher is interest rate hikes. I’ve already noted the sensitivity to rate rises that was seen back in November and December when the Bank of England met. Different economists have differing views of how many times this year the bank will raise rates, with most expecting between two and three increases. Some are even calling for one next month!
If we do see these hikes materialising, Lloyds shares should be carried higher. Even though some of this optimism has already been priced in, I think there’s more room to head higher. Ultimately, higher base rates allow Lloyds to increase the net interest margin it makes. It can build in a larger buffer between the rate it pays on deposits versus the rate it charges on loans.
Another opportunity for the bank this year comes from the dividend potential. This was flagged up in a great piece by my colleague Alan Oscroft. At the moment, the dividend yield sits at 2.52%, nothing to write home about. Yet this was based on the interim dividend of 0.67p. In just over a month, the full-year results are due out, and I’d expect the dividend per share to be raised.
If we do see this, and the bank indicates that it’s trying to normalise the dividend policy back to pre-pandemic levels, I think Lloyds shares could move higher. I imagine income investors will be keen to add a robust bank to a dividend portfolio.
Risks to consider
What about the flipside? For a start, there’s a clear risk in the fact that Lloyds shares are down 10% over the past week. This isn’t due to anything company-specific, but more about the negative sentiment in the markets right now: fears around high inflation, conflict with Russia, political uncertainty in Downing Street and much more.
The bank is sensitive to general sentiment, more so than other companies in the FTSE 100 index. This does become a risk if I think that 2022 isn’t going to get better. If I foresee a snap general election, or a Russian invasion, then the Lloyds share price could have further to fall.
A second risk for this year is the rise of FinTechs. In H2 last year we saw several companies go public, including Wise, the money transfer business. It reflects the growing power of FinTechs, be it for alternative banking products or add-ons such as mortgages and loans. Lloyds needs to be careful that the market share it has doesn’t get eaten away by this rising subset in the finance sector.
Personally, I think that the risks outweigh the rewards in the short term, but if we saw the share price continue to tumble in coming weeks then I’d be happy to buy for a long-term recovery.
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Jon Smith has no position in any share 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.
