Earlier this month, Lloyds Banking Group (LSE:LLOY) shares hit their highest level since 2008. At the current 112p, the big question through to the end of this year and beyond is whether it can keep going (and potentially push another 50% higher to 168p), or if a sharp retracement down is coming for the Lloyds share price.

The case for further gains

Even after the recent surge, Lloyds still trades at a very respectable price-to-earnings ratio of 15.93. For comparison, the FTSE 100 average is 16.4. So the stock can still be seen as undervalued relative to the broader index, or at least certainly not overvalued.

The business has been doing well financially, and if this momentum continues, the stock could follow suit. Its CEO noted in the Q1 results that “our differentiated business model remains resilient”, with gains seen in various divisions. The push to expand wealth management, insurance and other fee-based businesses should continue to help the overall group to outperform.

I think interest rates here in the UK will rise later this year. If they do, and indeed stay higher for longer than markets currently expect, it could provide another boost for Lloyd’s profits, particularly if loan losses remain subdued.

The other side of the coin

That said, Lloyds remains heavily exposed to the UK economy and housing market. A recession, rising unemployment or a meaningful fall in house prices would almost certainly increase bad debts and reduce demand for borrowing. If the Bank of England committee has to cut interest rates to try and help out, it could squeeze profit margins at exactly the wrong time.

Then there’s regulation. Lloyds has not yet fully settled the motor finance scandal, although it has set aside £1.95bn for a compensation scheme and dropped its initial legal challenge against the regulator’s redress plan. Any further issues with this case could not only knock profits but also investor confidence.

Making a call

I think it’s unlikely the stock would halve in value over the course of the coming year. The risks are there, but to trigger such a sharp move lower would need something seriously bad to happen.

Even though I say we might see 168p before 56p, I also don’t believe the stock will jump 50% in the next 12 months. The company is certainly doing all the right things, but the stock is no longer a screaming value buy. Now it’s getting closer to being fairly valued I believe the pace of appreciation for the share price will be a lot more measured.

Therefore, if an investor is looking for a high-growth pick, I think there are better ideas to look at. But if someone is targeting income (Lloyds has a dividend yield of 3.26%), or specifically wanting banking exposure, it could be one to consider.

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Jon Smith does not hold any positions in the companies mentioned.