Analysts at Morgan Stanley have a target of 64p set for the Lloyds Banking Group (LSE:LLOY) share price. That’s a gain of around 49% from today’s levels.
In a more optimistic outlook, the broker thinks Lloyds shares could reach 85p next year – an increase of almost 100%. But there are also some significant risks with the stock that are worth considering.
The bull case
The bull case is based on two ideas. The first is better returns on new mortgages and the second is lower provisions for loan losses.
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Together, these could offer a double boost for the bank’s earnings and a potential uplift for the stock. And the thesis is based on the dividend reaching 3p per share in 2024.
If that happens, the yield at today’s prices would be around 7%, which is very attractive even during a period of high interest rates. So Lloyd shares could also be a good source of passive income.
It’s worth noting that this the best-case scenario considered by the analysts. But at 43p per share, the stock could be a good investment at today’s prices even without getting to the 64p target next year.
The bear case
All of this sounds good and I don’t think it’s necessarily unrealistic. There are some big risks to consider, though, and one in particular that could be especially problematic next year.
Across Europe, banks have benefitted from higher interest rates. But their increasing profits have been attracting some unwanted attention from governments.
As a result, various countries have chosen to introduce windfall taxes. If something similar happens in the UK, banks like Lloyds could find their earnings come in much lower than expected.
The UK is headed for an election next year and politicians on both sides are keeping quiet on the possibility of a windfall tax. That’s a risk that investors ought to consider carefully before buying Lloyds shares.
Warren Buffett
How seriously should investors take the threat of a windfall tax? As is so often the case, I think looking to Warren Buffett for guidance is a good idea.
At the start of the year, Buffett elected to sell investments in US banks. At the Berkshire Hathaway annual meeting, he explained his reasoning for this.
The main issue was uncertainty over what the future might look like. Regulation, Buffett warned, might be in the hands of people whose interests aren’t aligned with those of shareholders.
The possibility of a windfall tax feels strikingly similar to me. And there’s a good case for thinking that investors like me ought to feel about Lloyds shares the same way Buffett feels about US banks.
Risk and reward
The Lloyds share price looks cheap at the moment – and it is. The question for investors is whether that’s because it’s accurately pricing in risks like a windfall tax in the near future.
That’s difficult to judge and this definitely makes it harder to see the stock as a screaming bargain. But I’m keeping a close eye on it for my own portfolio as we approach 2024.
