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Lloyds (LSE: LLOY) shares were stuck in the doldrums for years. An investor buying in during 2010 would be down on the stake 14 years later. There weren’t even any dividends paid until 2015 – a hangover from the Great Recession when banks of all shapes and sizes were slashing payouts to shareholders.
In 2024, the reversal of fortunes was stark. The share price kicked into gear, doubling in the space of two years or so. The cash was available to pay some chunky dividends too. Anyone buying around the 40p mark in the early months of that year is forecast to receive a 4.2p dividend over the next 12 months. That’s over 10% as an effective yield. Quite the contrast, isn’t it? So what changed?
Consequences
The biggest factor was the increase in interest rates. The Bank of England set interest rates at less than 1% for much of the 2010s – also called the ZIRP (zero interest rate period) era. Then the interest rates shot up in 2022 to counteract rising inflation.
Why was this good for banks? Because it gave them more flexibility. When borrowing costs are higher, there’s more wiggle room between the rates banks lend at and what they borrow at. Higher margins mean higher earnings. And that tends to result in increased dividends and money for buybacks, which puts upward pressure on the share price.
Here’s where things get interesting. The interest rate was supposed to fall slowly from the high of 5.25% to the Bank of England’s target of 2% as inflation fell with it. Not only have rates been falling more slowly than expected, but the consequences of the war in Iran have meant that markets are now expecting a rate hike in 2026 instead.
In other words, the boom times might not be over for the banking sector and the current 96p share price might possibly turn out to be just as good a buy as when it was 41p in 2024.
On a sixpence
There are risks here too. The conflict in the Middle East could change on a sixpence. On the day that I write (8 April), the parties have agreed to a two-week ceasefire. If that stands and turns into lasting peace (which of course we’re all hoping for) then the whole situation around interest rates and inflation could change.
Another danger is the possibility of a windfall tax. The banking sector is right in the crosshairs when profits rise. And a windfall tax had already been mooted last year (although it didn’t happen in the end). That the oil and gas industry had a tax applied in 2022 could be a sign of more sector-specific taxes to come.
On balance? We live in such interesting times that it’s hard to say which way things are going to go. I think Lloyds shares are worth considering nonetheless.
This story originally appeared on Motley Fool
