2021 was a good year for the Lloyds Banking Group (LSE:LLOY) share price, which climbed over 34%. And so far this year, this performance has continued with Lloyds shares up over another 10%. Will this be an explosive year for this major British bank? And can the stock return to its pre-pandemic levels? Let’s explore what could happen to the Lloyds share price in 2022 and whether I should be adding this business to my portfolio.
The Lloyds share price before the pandemic
The stock was nearly 70p before the pandemic. But when the lockdowns were announced, the stock entered a free fall. It went to its lowest in over a decade at 28.15p per share on 22 May 2021. This was largely due to the enforcement of lockdown to curtail the Covid-19 pandemic, combined with a further cut to interest rates.
The doom and gloom atmosphere brought about by the lockdown hit hard on Lloyds shares as well as other companies. While the pandemic is still very much around, as the virus keeps mutating, I think the worst may now be over for this stock.
A look at the Lloyds share price in a post-Covid UK
Already investors have gotten used to the pandemic and all that comes with it. Although the virus keeps mutating, I think a new variant will not send as big a shock wave among investors seen in early 2020.
Many individuals are already looking towards the post-pandemic world for their investment portfolios. That being said, buying Lloyds shares at their current price could be a lucrative venture, in my opinion.
What makes it interesting for me as a value investor is that Lloyds stock still looks exceptionally cheap at a price-to-earnings ratio of around 7, despite its recent upward momentum. Combining this with a 2.35% dividend yield makes it a good choice in my mind for my passive income portfolio.
Rising inflation and interest rate hikes
Since the pandemic, inflation has risen in ways not seen in many years. If it continues, more interest rate hikes will likely take place. The Bank of England has already raised the interest rate from 0.1% to 0.25% on 16 December 2021. If prices continue to rise, it will not be surprising to see other increases in the coming months. What does this mean for banks like Lloyds?
When there is a rate hike, most banks smile as it means borrowers pay higher interest on their loans. What’s more, savings accounts become more attractive to individuals, boosting deposits and enabling these financial institutions to issue more loans.
In my opinion, this should help the share price of banks like Lloyds to rise higher this year. In fact, I think it’s even possible for the stock to potentially double in 2022.
Some risks to consider
While the outlook seems all bright to me for the Lloyds stock, it is not all rosy. The banking industry is becoming ever more competitive, and not just between banks. Financial technology companies have begun stealing significant market share for consumer finance activities.
If Lloyds cannot maintain the popularity of its consumer banking segment, its pool of available deposits could start to shrink over the long term. Needless to say, that could have a profound impact on Lloyds long-term performance, and in turn, its share price.
Personally, I think the risk is worth the potential reward. Therefore I am tempted to add some shares of this business to my portfolio.
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Prosper Ambaka does not own shares in any of the companies mentioned. The Money Cog has no position in any of the companies mentioned at the time of writing. Views expressed on the companies, assets, and strategies mentioned in this article are those of the writer and, therefore, may differ from the opinions of analysts in The Money Cog Premium services.
