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The last 12 months have been pretty impressive for the Lloyds (LSE:LLOY) share price. While the UK bank stock has historically been quite stable, the benefits of higher interest rates and a favourable Supreme Court ruling have helped push its market-cap up by a solid 42%.
That’s enough to turn a £5,000 initial investment into £7,100 – not bad considering the FTSE 100 is only up around 14%. So now the question becomes, how much money could investors make over the next 12 months if they invest £5,000 today?
What the experts say
As one of Britain’s most popular stocks, Lloyds garners a lot of attention from institutional investors. And right now, 18 of these analyst teams are tracking the enterprise, 11 of which believe the shares are still worth buying right now.
Of all these bullish experts, Jefferies currently stands out as the most optimistic. In fact, its forecast suggests the Lloyds share price will finally surpass the £1 threshold for the first time since 2008 within the next 12 months, landing at 103p. JP Morgan‘s the second most optimistic, with a price target of 98p – just shy of the £1 threshold.
Compared to where the stock’s trading today, that suggests a capital gain of up to 24%. And when throwing in an additional 4% gain from dividends, a £5,000 investment today could grow into £6,400 by October next year.
While that’s not as impressive as what’s been delivered over the last 12 months, it’s still more than triple what the UK stock market delivers on average. As such, Lloyds definitely merits a closer look.
What to watch
Jefferies’ and JP Morgan’s projections are based on similar assumptions. Both expect the bank to continue benefiting from higher net interest margins, thanks to its interest rate hedging portfolio.
While lending margins will eventually start to fall over time, the intermediate proceeds being allocated towards aggressive buybacks support a higher share price. This is only compounded by the investments being made into boost operating efficiency to grow the all-important return on tangible equity (RoTE).
However, even with these drivers, both firms have identified key risks that could result in the Lloyds share price falling short of expectations. If the Bank of England starts cutting interest rates faster than expected, margin compression could accelerate, shortening Lloyds’ ongoing buyback spree.
At the same time, it’s important to remember that Lloyds generates a significant chunk of lending income from mortgages, where demand is currently being suppressed by weaker macro conditions. Should the British economic situation worsen, the loan book could struggle to grow while impairment charges climb.
The bottom line
All things considered, Lloyds appears to be in a much stronger financial and operational position compared to a few years ago. And even with interest rates slowly normalising, so long as they don’t return to zero, the bank stock should have an easier time expanding compared to the last 15 years.
As such, investors interested in gaining exposure to the banking industry may want to consider taking a closer look. But personally, I’m exploring other opportunities within the finance sector that could be even more promising.
