For much of the past decade, the Lloyds (LSE: LLOY) share price has been a perennial underperformer. However, I think that could be about to change.
As the Bank of England embarks on a tightening cycle, which could see the interest base rate rise significantly from current levels, I believe there is a growing chance the stock could rise 100%, or more, from current levels. And that means investor sentiment towards the business could change significantly.
Lloyds share price outlook
It is almost impossible to say when this will happen, but I can point to some indicators that I believe will drive a re-rating of the share price. A combination of factors will help improve investor sentiment towards the business, ultimately leading to a higher valuation and share price.
The most important factor is rising interest rates. As these increase, Lloyds will be able to lift the amount of interest it charges to borrowers. As one of the largest mortgage lenders in the country, this should significantly impact overall group profitability.
At the same time, the improving economic outlook should stimulate demand from borrowers. As Lloyds’ bottom line improves, it should have more capital to lend to individuals and businesses. This combination of factors could form a dual tailwind of both more lending and lending at higher rates of interest.
And on top of these factors, I also need to consider the bank’s other growth initiatives. These include its expansion into the credit card business, build-to-rent property and wealth management.
All of these businesses have higher returns than the traditional lending arm. As such, they could all have a significant positive impact on group return on equity (a key measure of banking profitability) and, as a result, the Lloyds share price.
Unfortunately, the group’s growth cannot be taken for granted. It is facing multiple challenges as well as the tailwinds outlined above. These include inflation pressures and competition in the banking sector. And if there is a sudden economic downturn, banks are usually the first to feel the pain. I will be keeping a close eye on these factors as we advance.
Nevertheless, the fact remains that the company’s outlook is significantly improving, which could have a transformative impact on investor sentiment.
Improving market sentiment
As mentioned above, the stock has been a relatively lousy investment to own since the financial crisis. A lack of growth has put investors off, and this sentiment has weighed on the share price. A negative circle has formed whereby investors avoid the Lloyds share price because its performance has been so poor, putting off new investors and holding back the stock.
However, as growth returns, I think sentiment will change. What’s more, I think the stock looks dirt-cheap. The shares are currently selling at a price-to-book (P/B) multiple of 0.7. International peers, reporting earnings and book value growth, are trading at P/B multiples of around 1.5.
These figures suggest that as the company returns to growth and investor sentiment improves, the stock could double in value. That is why I would buy the shares for my portfolio today as a growth and recovery play.
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Rupert Hargreaves 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.
