If I bought Lloyds shares now, what could my return be in a year’s time?

The stock price of Lloyds Banking Group (LSE:LLOY) is very close to hitting a 52-week high of 54p. Lloyds shares have been on a tear, up 26% in the past three months. It may have been flat over the past year, but there is clear momentum, especially in 2023.

So if I invest now, can I get benefits in the future?

Enjoy monetary policy action

To understand what can be the return, I have to carefully examine what has been driving higher and determine if this can continue.

One obvious benefit is the situation with interest rates in the UK. It has been moving more over the past year, allowing Lloyds to benefit from higher net interest income. But if the central bank were to raise rates too high later this year, it would risk pushing the UK deeper into recession.

Over the past month, the Bank of England has signaled that it is now close to peak levels. This is good news for Lloyds. Because it is mostly a retail client base, it signals that rates will not be higher than mortgage rates and other loan products.

In a way, it is a balancing act that (until) used in Lloyds favor. High rates allow them to make more money, but the rates are not high enough to destroy the retail client base.

A gauge of potential gains

Since the central bank started its rate hike cycle last April, Lloyds shares have risen 25%. An interesting point to note is that there is a lag between the rate being raised and the bank feeling the benefit of the higher net interest margin.

For example, the margin of 2022 years at the end of Q3 is 2.84%. I expect this to be up close to 3% for Q4 numbers. With base rates currently at 4%, I expect it will be until the end of this year before Lloyds’ margins get anywhere close to this.

Why I signaled this is that bank profits should continue to increase, even if interest rates stop. Therefore, I think the upside potential for the share price is around the 25% mark, reflecting the lagged benefits of higher earnings in the next year.

Be aware of the risks

I realize that I can also make negative returns if I buy stocks now. A big risk is that I have misinterpreted the economic data and the UK can really struggle with interest rates as high as they are. Loan defaults, lower card spending and other factors can reduce the bank’s income.

Another potential problem is the continued closure of branches. About 18 units will close in the spring. Although digital banking is the future, closed locations actually reduce the banking options of older clients and can also have a reputational impact.

I think the best scenario could be a price rise of 25% from the current level. But I also know that the economic downturn could see investors flee stocks later this year. On balance, I think I can get some form of positive return and I’m thinking of adding the stock to my portfolio.