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3 big points I think will drive Lloyds shares this year

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Over a one-year period, Lloyds Banking Group (LSE:LLOY) shares have risen by 34% as I write. This seems impressive, although most of this move came in the first quarter of 2021. Over the last six months, Lloyds shares are only up 1.5%, meandering in the 45p-50p range. For 2022, here are the three main things that I think will dictate where the share price goes from here.

Sensitivity to rate changes

The first point is interest rates. The sensitivity of Lloyds shares to interest rate decisions was made very clear in late 2021. In November, the market was expecting the Bank of England to raise rates. The committee didn’t, causing the share price to tumble almost 5% on the day. Last month, the central bank did raise rates. This saw Lloyds shares jump, along with other banking stocks such as Barclays and Standard Chartered.

The reason for the sensitivity is due to the benefit that the bank gets from higher rates. It allows Lloyds to increase the margin that it makes on borrowing versus lending money. For example, it might charge me 2.5% to get a loan, but only pay me 0.1% on my cash deposits. This 2.4% is the net interest margin. If interest rates increase to 1%, they might pay me 0.5% for cash but charge me 3.5% on a loan. Ultimately, the margin is higher when rates increase.

Therefore, if interest rates do increase this year, I’d expect to see Lloyds shares move higher.

Lingering impact of the pandemic

The second key factor, in my opinion, is Covid-19. It affects all stocks, but some more than others. For Lloyds, it has a sizeable impact. This is because Lloyds has a large retail client base. Therefore, it feels the effects that the average person on the street is feeling. This relates to spending, mortgages, loans and credit cards. 

If Covid-19 continues to cause uncertainty, it would be negative for the bank. Lower spending, higher loan defaults and other issues such as these all reduce the opportunity to make revenue, which filters down to lower profits.

FinTech alternatives

The last factor is how the bank deals with new rivals. The FinTech space is growing rapidly, even being aided by the Government. It’s already eating into the share of banking products from established players. This can be seen with the ease of opening an account digitally, plus the availability of loans, mortgages, cross-border payments and much more. 

Lloyds doesn’t have to lose out here. It can look to buy some smaller competitors, and integrate their software. It can also build partnerships with FinTech firms, strengthening both businesses without either losing ground.

Ultimately, the ball is in the court of the traditional banks to decide what to do here. If Lloyds does embrace FinTech peers, then I think its shares can move higher.

These three factors are all very different. Some of them the bank can control, others are external issues that can’t really be controlled by anyone. As an investor, I’m going to hold fire on buying Lloyds shares right now until I get some clarity on how the year will pan out.

The post 3 big points I think will drive Lloyds shares this year appeared first on The Motley Fool UK.

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Jon Smith has no position in any share mentioned. The Motley Fool UK has recommended Barclays, Lloyds Banking Group, and Standard Chartered. 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.