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Why Lloyds Banking Group PLC Could Be The Best Performing Bank In The Run-Up To The General Election

Fool readers will no doubt be familiar with the events surrounding the UK banking sector during the last five years.

Indeed, it has been a tumultuous time for UK banks, notably Lloyds Banking (LSE: LLOY) (NYSE: LYG.US) and Royal Bank of Scotland in which the government still owns large stakes.

However, as every successful investor knows, turning disaster into opportunity can bring vast rewards. Therefore, while the banking sector undoubtedly brings substantial risk, it also offers the scope for significant potential upside.

Of course, investing in UK banks means accepting that their future performance is not only tied to the fortunes of the UK economy, but is also inextricably linked to politics.

In fact, it is becoming clear that the government is keen on the idea of offloading at least one of the part-nationalised banks before the 2015 general election, with Lloyds Banking arguably the more likely as its balance sheet is ‘less sick’ than that of RBS.

The reason for the offloading seems to be entirely political; convince the electorate that the coalition government has ‘cleaned up’ the banking sector and it could be a vote-winner.

However, Lloyds Banking remains a loss-making company. Although losses per share fell by around 50% to 2p in 2012, the bank remains fragile and susceptible to catching another cold, should the UK economy fall into yet another recession.

On the plus side, the market is anticipating a return to the payment of dividends in 2014, with 1p per share forecast. Although this would equate to a yield of just 1.5%, investors may view the payment as symbolic; a return to health, a return to ‘normality’. Such a view could lead to more positive sentiment.

In addition, the government is unlikely to berate the bankers to the same extent during the next two years as it has in the last three. It wants to sell its stake for as high a price as possible and is well aware that positive news flow (or a lack of negative news flow) could make a substantial difference to this goal.   

So, while investing in Lloyds Banking comes with a large dollop of risk, such risk could be swept away by improved news flow, more positive sentiment and a perceived return to normality. All of which are likely to mean that the shares perform well during the next two years.

Let me finish by adding that I own shares in Lloyds Banking and RBS and would recommend that if you are looking for more opportunities in the FTSE 100, this exclusive wealth report reviews five particularly attractive possibilities.

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> Peter owns shares in Lloyds Banking and Royal Bank of Scotland.