Are Lloyds shares set to remain positive ahead of 2020 results?

• Dividend payments could return in 2021
• Risk rating attached to Lloyds is reducing
• What are the signs Lloyds has the funds to absorb losses?

The value of the Lloyds (LLOY.L) share price has pared some of the gains from the back end of 2020, falling from highs of 39.50p in November to 33p at the end of January. Nevertheless, there is renewed optimism for a more sustained rally in Lloyds shares for 2021, just a few weeks ahead of the bank’s full-year results for 2020.

With Lloyds set to publish the full picture of the effects of Covid-19 on its 2020 operations on 24 February, attention is already turning to what the outlook is for the UK’s largest retail bank.

Could Lloyds dividend return for shareholders in 2021?

Lloyds' last dividend – pre-pandemic – was 3.2p per share. Anything similar this year would therefore represent a much greater dividend yield, given that the Lloyds share price has almost halved.

In December 2020, the Bank of England’s (BoE’s) Prudential Regulation Authority enforced a temporary ban on dividend payments to the shareholders of the UK’s ‘big five’ banks, including Lloyds. That ban has since been lifted, prompting excitement among Lloyds shareholders.

Do risk factors appear to be diminishing for the Lloyds Banking Group?

Understandably, investors marked down the potential value of Lloyds assets based on the increasing default risks posed by the Covid-19 pandemic and subsequent lockdowns. The threat of a no-deal Brexit was also looming large on the horizon. Fortunately, a Brexit trade deal was agreed upon, and the UK is forging ahead with its bold nationwide vaccination programme; which analysts believe to be positive signs for the Lloyds share price.

As evidence of this, both Barclays and Deutsche Bank have lifted their price targets for Lloyds in recent weeks. After their own shares rallied off the back of Covid-19 vaccine news early in December, Barclays analysts reported that Lloyds’ recovery promises to be ‘bumpy’ and that the ‘situation remains fluid’. Meanwhile, Deutsche Bank analysts anticipate that there are ‘brighter days ahead’ for the UK retail banking sector as a whole.

Lloyds also appears to have an encouraging risk profile for the year ahead. Its capital ratio, last recorded at the end of quarter three (Q3) of 2020, was 15.2%. As this represents the amount of capital the bank has access to absorb losses and continue to lend to customers, this illustrates quite a positive surge. The ratio is, surprisingly, up from 13.8% at the beginning of 2020.

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