I’m predicting the Lloyds (LSE:LLOY) share price will push above 50p by the end of the year. It hasn’t been a great year for investors in the bank so far, but the lender’s performance has been going from strength to strength.
So let’s take a close look at why I’m so bullish on one of the UK’s biggest banks.
Net interest margins
Net interest margins (NIMs) — the difference between savings and lending rates — are rising. This means banks are making more interest on the money they lend to customers. In fact, with Bank of England rates incrementally pushing upwards, Lloyds is even earning more interest on the money it leaves with the central bank.
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Higher rates have already made an impact on the bank’s margins. Lloyds announced in July that net income had surged 65% to £7.2bn for the six months to 30 June.
And rates are poised to go higher. In fact, some analysts see interest rates reaching as high as 4% in an effort to bring down inflation. These are figures that we haven’t seen since the early 2000s and would have a profound impact on the Lloyds’ profits.
A gift from the new prime minister
With Liz Truss taking top office, there appears to be more good news for banks. The new prime minister plans to scrap a move to increase corporation tax. The Labour Party told the Financial Times that the move would effectively see a five percentage point cut in banks’ tax bills.
This is because, in 2015, the government introduced an 8% surcharge on bank profits. And that comes on top of the current 19% corporation tax. But the government intends to cut that surcharge to 3% as corporation tax had been billed to go up. If it’s frozen and the surcharge reduced to 3% as planned, banks would receive a considerable boost.
Proposed deregulation could also provide new ways for the bank to make money. However, Truss’s proposals haven’t gone down well with everyone in the City.
Why Lloyds?
The above reasons for backing Lloyds are relevant to all UK banks. But there are several reasons why I like Lloyds specifically.
Around 60% of its loans are UK mortgages. And I think that’s a relatively safe area of the market. I also think it’s an area of the market that will continue to grow over the long run. After all, the UK has an acute shortage of housing.
I’m also interested by Lloyds’ move into the rental market. The bank intends to buy some 50,000 homes over the next decade. It won’t be good for diversification but I see it as a highly profitable venture.
Lloyds also trades with an attractive price-to-earnings ratio of 6.5 and a dividend yield at 5%.
There are, of course, risks. There’s a recession forecast in the UK and that’s not going to be good for credit quality. But with NIMs on the rise and a tax boost from Truss, I can see the Lloyds share price shooting up this autumn.
I already own Lloyds shares. But at the current price, I’d buy more.
