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Why the Lloyds Bank (LLOY) share price rose 31% in 2021

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The Lloyds Banking Group (LSE: LLOY) share price rose by 31% in 2021, making it one of the top 20 performers in the FTSE 100. Here, I’ll explain what happened at Lloyds last year — and why the market is pricing the bank’s stock more highly than it was 12 months ago.

Winning the reopening trade

Almost all of 2021’s gains came during the first half of the year, when the bank’s stock rose by nearly 30%. Why did Lloyds perform so well during that six-month period? There were a couple of reasons.

First of all, the bank was seen as a likely winner in the UK reopening phase. As the vaccine rollout gathered pace and lockdowns receded, investors gained confidence in Lloyds’ ability to return to growth.

Lloyds’ 2020 results in February supported this view. The bank reported strong growth in mortgage lending and said its trading profits for 2020 had fallen by just 27%, despite the impact of the pandemic. Bad debt forecasts were left largely unchanged, giving investors hope that loan losses from the pandemic might be smaller than originally expected.

Departing chief executive António Horta-Osório was even able to declare a small final dividend for 2020. The bank’s guidance for 2021 also suggested that profits would hold up well and the dividend would return to growth.

Lloyds’ share price goes on a rollercoaster ride

The Lloyds Bank share price dipped ahead of the bank’s first-quarter results in April 2021. But the stock soon bounced back when it reported a Q1 profit of £1.4bn and upgraded its profit guidance for the year.

City analysts crunched the numbers and increased their dividend forecasts for 2021. Lloyds share price kept on rising and touched 50p in early June.

However, things then started to change. By late June, investors were starting to worry about rising inflation. There was also uncertainty about when the government would decide to lift the remaining Covid-19 restrictions.

Holding on despite uncertainty

By the end of July, Lloyds’ shares were down from their June peak, but the bank was still performing well. Half-year results showed rising profits and another cut to expected loan losses.

Interim boss William Chalmers was confident enough to raise the bank’s 2021 profit guidance for the second time in three months. City analysts tweaked their forecasts higher again while they waited for new chief executive Charlie Nunn to start work in August.

Then Nunn made headlines with plans to turn Lloyds into one of the UK’s biggest rental landlords. But we don’t know much about this yet. For now, the market expects Lloyds to use some of its growing pile of surplus cash to support larger dividend payouts.

The bank’s 2021 dividend is expected to rise by 271% to 2.11p per share, giving a forecast yield of 4.4%. In 2022, City analysts are forecasting a 13% increase to 2.4p per share, giving a 5% yield.

Lloyds’ 2021 annual results are due to be published on 24 February. Watch this space for further coverage.

The post Why the Lloyds Bank (LLOY) share price rose 31% in 2021 appeared first on The Motley Fool UK.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.