The Lloyds Banking Group (LSE:LLOY) share price has seen uncharacteristic volatility in recent months. After falling to 43p in late summer, Lloyds shares recovered into the autumn, only to be slapped down following the Bank of England meeting in early November. However, another recovery has been seen, with shares now back at the anchoring level of 50p. We think momentum is now with the stock to break higher into the end of the year.

Solid recent results

Before we get to the impact of the Bank of England, it’s important to note the Q3 results that were released in late October. The company is performing well. Statutory profit for the quarter came in just above £2bn, double the £1.03bn from the same quarter in 2020.

With net income up 20% on the same period last year and costs only up 2%, it’s clear to see that Lloyds have largely put the impact of the pandemic behind them. To this end, Lloyds was able to release £84m of impaired loans compared to a charge of £301m from 2020. This helps to show that the precautions taken for defaults and bad loans are slowly being able to be eased.

If this process continues, then we think that Lloyds shares naturally should have some uplift. The cloud of uncertainty from the pandemic was certainly felt by the banking sector. On top of the impairment provisions, general consumer spending slowed as well, hurting transactional revenue. Given that Lloyds is primarily a retail bank, it felt the hurt more than other competitors that have more rounded service offerings.

However, the recovery for the bank should now be quicker than rivals, making it one of our favourite banks to hold in a portfolio.

A blow from the central bank

The recovery was partially derailed by the Bank of England meeting earlier this month. In a surprise to many market participants, the committee decided not to raise interest rates by 0.15%. This was already priced into bond and currency markets, as well as Lloyds shares. So the decision not to hike meant that Lloyds shares dropped almost 5% on the day. 

To understand this logic, it’s key to note the relationship between bank income and the base rate. Lloyds make money mostly from the net interest income. This is the difference between the rate it lends out at versus the rate it pays on deposits. The higher the base rate, the larger the spread can be. So higher rates are good for Lloyds. 

The negative surprise was a blow in the short-term. But the next meeting in December should see the central bank put this right. It’s a key few weeks for Lloyds, to see whether shares can carry momentum and move comfortably above the 50p level to end the year.

Personally, we think that the bank will raise rates, with Lloyds shares being a beneficiary of this not only in the short run but also into next year.

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