Lloyds Banking Group (LSE:LLOY) shares have been doing very well recently. Up 35% over the past year, the Lloyds share price hit fresh 52-week highs earlier this week. Even though there are solid reasons for the rally, I think some are now focusing on what’s next for the stock. From my research, here’s what I think lies in store through to the end of this year.
The recent past
Even though past performance is no guarantee of future returns, I can look at what has driven the stock so far this year and go from there.
From my perspective, one of the main drivers has been the Bank of England’s policy committee pushing back on rate cut expectations. Coming into this year, I thought we would have seen our first rate cut in the spring. Yet here we are in July with the base rate still above 5%.
This extra period of high interest rates has help Lloyds to enjoy elevated profits for longer. It’s true that the Q1 results showed the net interest margin had fallen from 3.22% a year ago to 2.95% now. But this is still well above where it was during the pandemic.
Further, the UK economy has done better than some of us expected. Data out yesterday (11 July) showed that GDP grew by 0.4% in May, double the 0.2% gain that was forecast. The Lloyds share price is a bellwether for the broader economy, as it banks a large retail client base. So based on how active these customers are in spending and taking loans out, it’s reflected in the stock.
Looking ahead
I think that if the economic data continues to show the UK economy is doing well, the stock can keep rallying in H2.
Some flag up that interest rate cuts are coming, and this is a risk for the share price. I partially agree here, but do want to point something out. Lower interest rates will reduce the net interest income. But on the other hand, lower rates will boost demand for mortgage products and other loans. So the actual negative impact overall could be less than people might think.
At the end of this month we get the half year results. This will also be a factor in determining where the stock heads for the rest of the year. Yet if it keeps to the guidance that it issued last quarter, I don’t see it being a a problem for the share price.
Even though we recently hit the 52-week highs, I wouldn’t say the firm is overvalued as we start H2. The price-to-earnings ratio is just 7.64. This is below the benchmark figure of 10 I use as a fair value. So there’s room to run higher for the share price even if the earnings per share figure stays the same.
The next six months
Trying to predict the future isn’t easy. I’ve based my forecasts on my own subjective viewpoint. The risk is that I’ve missed some key factors that could make the stock fall in coming months. But based on my view, I think the Lloyds share price continues to head higher from here. On that basis, I’m thinking of adding the bank to my portfolio.
This post was originally published on Motley Fool
