Where next for the Lloyds share price after buoyant Q3 results?

The Lloyds share price (LON: LLOY) hit its five-year low of 24.72p on 25 September 2020, before rising to 49.89p on 28 May 2021. It then fell back to 42.56p by 10 September 2021 and has now risen to 49.57p today. But it’s still around 22p off its five-year high of 71.78p that it achieved on 19 May 2017. And with a roaring housing market and rapid economic recovery, Britain’s biggest retail bank could reach those heights again.

Lloyds share price: Q3 results

The figures underneath Lloyds’ increased profitability are sound. Total loans and advances are at £450.5 billion, up £10.3 billion in the quarter. Customer deposits have increased by £4.7 billion to £479.1 billion. And as a result, its loan to deposit ratio is 94%. This liquidity gives the bank the financial headroom to profit from further lending as the UK economic recovery strengthens.

During the pandemic, Lloyds had set aside £1.2 billion for loan defaults. This quarter, it’s been able to bolster its profits by releasing £84 million of this money. That’s on top of the £656 million already released so far this year. For perspective, in Q3 2020, the bank lost £301 million to bad loans.

And CEO Charlie Nunn said he saw ‘significant opportunities for Lloyds Banking Group to further develop its platforms and capabilities and grow through disciplined investment.’ He highlighted the bank’s ‘strengths of customer service, distribution, and cost management.’

Furthermore, Lloyds had a CET1 ratio of 17.2% in September, against the regulatory requirement of 4.5%, and a self-imposed target of 12.5%. In theory, this means Nunn has the capital to expend on further investments, increase dividends, or weather out what could potentially be a difficult winter.

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Reliance on the housing market

Lloyds saw a £2.7 billion net increase in home loans in Q3, bringing mortgage lending for the year to £15.3 billion. This was the fastest rise in over a decade and mirrors the surging housing market.

In a ‘race for space,’ average house prices have risen 10.6% in the year to August to £264,000. The demand for mortgages has been spurred on by the stamp duty holiday as well as £197 billion of additional household savings built up during lockdowns. It’s seen the bank lend £12.8 billion to first-time buyers so far this year, far exceeding its £10 billion 2021 full-year target.

And net interest income increased 4% quarter-over-quarter to £2.9 billion, primarily due to this increased mortgage demand. With the Bank of England likely to raise interest rates soon, this figure could rise even higher.

With house prices continuing to increase, Lloyds is planning to diversify its revenue streams by purchasing 50,000 rental homes over the next ten years. This would make it one of the UK’s largest landlords. And the bank projects this will generate £300 million in pre-tax profit over the decade.

However, the Institute for Fiscal Studies predicts that UK CPI inflation will hit 4.6% in April 2022. If inflation rises even higher, interest rates will have to rise significantly. And this will increase mortgage costs. While Lloyds would benefit from higher mortgage payments, this also comes with a risk of loan defaults and falling house prices.

But the Lloyds share price is up 1% today. And if the UK’s economic recovery continues it could rise further. But unlike most of its competitors, it has no international operations. And for better or worse, that makes it more susceptible to domestic economic policy.