Does Lloyds’ Share Price Have Further Upside Potential?

Lloyds (LON:LLOY) share price has recovered well since the pandemic and may be set to edge higher if the bank reports another solid quarter when it releases Q3 results on Thursday 28 October.

Lloyds share price below pre-pandemic levels despite recent gains

Lloyds’ share price is currently hovering around the 49p mark, up 40% year to date, but slightly below the 52-week high of 50.56p it closed at on 1 June. Significantly, the stock remains roughly 22% below the 63p level at which it started 2020, before the pandemic caused Lloyds’ share price to more than halve, as the bank paused dividends and stockpiled cash to cover a potential spike in loan defaults. However, that expected rise in defaults never materialised, at least not to the extent that was feared. And now, across the banking sector, those emergency stockpiles are being drip-fed back onto balance sheets. This is giving the major banks’ quarterly performance an extra lift, which in turn is having a positive effect on banking stocks.

Lloyds reported on 29 July that profits for the first six months of the year came in at £3.9bn, boosted by the release of £656m (£323m in Q1, £333m in Q2) from emergency reserves it set aside to guard against possible loan defaults. Since that July announcement, Lloyds’ share price has risen 6%. As the economy recovers from the Covid crisis, Lloyds’ share price could be poised to make further gains if the bank can underline its strong position by posting another solid set of results for Q3.

Can Lloyds build on a robust half-year?

Lloyds’ half-year results showed an improvement in the performance of the underlying business. Net interest margin (NIM) rose to 2.50%, up from 2.46% in Q4 2020. While a welcome development, NIM remains below last year’s 2.52%, and the 2.88% recorded in 2019. However, the recent steepening of the yield curve could see margins continue to recover. On the customer side, deposits grew £23.7bn to £474.4bn in the first six months of this year, while lending increased £7.5bn to £447bn, driven by growth of £12.6bn in the open mortgage book. However, lending to SMEs and corporate clients declined slightly on a quarterly basis in Q2, suggesting that while consumers were spending again, businesses were a little more reluctant to open the purse strings.

In Q3, the UK economy’s post-Covid recovery slowed, as higher prices began to affect consumer behaviour. It also seems likely that mortgage demand fell during Q3, as various tax measures to support the housing market came to an end. It will be interesting to see what effect, if any, these factors had on Lloyds’ overall Q3 performance.

Near-term outlook seems positive

Lloyds resumed dividend payments in February and, given how well it has continued to perform, a share buyback or special dividend could be on the cards in the near future, possibly when full-year numbers are released. Meanwhile, Lloyds’ acquisition of Embark, a wealth management and pensions company, is due to complete in Q4, adding £35bn of assets to Lloyds’ books and complementing its Scottish Widows brand. First, though, investors will be keeping a keen eye on Lloyds’ share price after the bank announces its Q3 earnings at 7am on Thursday 28 October.

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