Image source: Getty Images
The FTSE 100’s climbed 57% over the last five years. But Lloyds (LSE:LLOY) shares have left the index in the dust with a gain of over 105%.
Investors who bought the stock in April 2020 have done very well. This however, has as much to do with buying at the right time as the underlying business.
Five-year plans
With the benefit of hindsight, April 2020 was a great time to buy quite a lot of stocks. A number of companies saw their share prices hit by uncertainty around Covid-19.
This wasn’t true of every business. Some shares – especially those in companies in the life sciences industry – got a big boost as demand for vaccines surged.
Lloyds however, was very much in the category of stocks that struggled. During the pandemic, it fell 50% and a good amount of the return since then has been a recovery from this.
To some extent, the stock’s an illustration of the benefits of being brave when there’s fear around. But this isn’t just the result of being in the right place at the right time.
Over the last five years, trading conditions for banks have improved considerably. Interest rates have gone from 0.1% to 4.5% and Lloyds has been a major beneficiary.
In general, higher rates make for better margins and Lloyds has seen its net interest margin widen from 1.8% to 2.2%. That doesn’t seem like a lot, but it amounts to a 22% increase.
Outlook
It’s probably fair to say that the big forces that have driven the Lloyds share price over the last five years are unlikely to repeat themselves. And in fact, there are signs they might be turning.
This month is set to be a crucial one for the bank. The threat of big liabilities arising from its previous practices around selling motor loans has been weighing on the stock for some time.
The case is set to be heard in the Supreme Court this month. And if things go well, Lloyds could be in a position to release the £1.2bn it has put aside to cover potential losses.
That’s around 2.5% of the company’s current market value. Adding this to an ongoing share buyback programme worth £1.7bn could generate significant returns for shareholders.
Elsewhere though, there are some potential challenges ahead. The Spring Statement last week reported that UK GDP is set to grow more slowly than expected for the rest of the year.
That’s not good for banks – including Lloyds – and it might incentivise the Bank of England to cut interest rates. If that happens, lending margins could contract again.
More to come?
Lloyds shares have been a terrific investment over the last five years. But this wasn’t easy to see in April 2020, when the pandemic was gathering momentum.
Investors considering the stock today need to be careful. The company is in a much stronger position, but there’s a lot more scope for things to get worse.
I’m not convinced the current share price fully reflects the risks at the moment. But I’ll be watching carefully to see what happens as the motor finance-related hearing at the Supreme Court unfolds.
