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Why Lloyds Banking Group PLC Profit Forecasts Have Risen Fast

FTSE 100 companies like Lloyds (LSE: LLOY) (NYSE: LYG.US) are analysed in detail by dozens of stockbroker analysts across Europe. Few investors can claim to have researched the company as much as these men and women. In almost every month of the last year, their average forecast for Lloyds’ profits has been raised.

Share price and profit forecast movement

One year ago, analysts were forecasting that Lloyds would make earnings per share (EPS) of 3.6p for 2013. Six months ago, the consensus expectation was for 3.8p of earnings. Today, that figure is 5.2p. This improvement in profit perceptions has had a dramatic effect on the Lloyds share price.

This time last year, Lloyds shares were available for 37p. By March they were 50p. Since then they have advanced more than 50%. At the time of writing, Lloyds shares are available at 76p. The shares have more than doubled in the last 12 months and are over 50% ahead so far in 2013.

That puts the shares at their highest since 2009.

Why forecasts have been rising

Lloyds’ recovery has been faster than many expected. The company has been selling off non-core parts of its operations. This includes flogging its stake in Sainsbury’s Bank and reducing its holding in St James’ Place. The spin-out of TSB yesterday looks like a big success, bringing this part of the business closer to a sale.

The recovery in the UK economy has provided a significant tailwind, especially as Lloyds has become more UK-focused. This has led to a dramatic reduction in impairments at the bank.

2014 profit forecasts

According to the average of analyst forecasts for 2014, Lloyds is expected to make 6.5p of EPS.

The shares are today trading on a 2013 P/E of 14.3. That’s a slight premium to the average FTSE 100 share, which trades at 13.9 times forecast earnings. However, Lloyds’ forecast growth is significant and would reduce that P/E to 11.5.

Verdict

Lloyds has come a long way and has provided big rewards to investors that backed it throughout the eurozone crisis. Today, it almost looks like a normal bank again. When its plan to shrink is complete and the government stake has been sold, Lloyds could return to the days of year-in, year-out profit and dividend increases.

Until Lloyds starts paying a dividend, investors will have to look to other stocks for income. Our team of analysts here at the Motley Fool have highlighted their top dividend pick in the report “The Motley Fool’s Top Income Share Today” . This report is 100% free and will be delivered to your inbox immediately. Just click here to get your copy of this insight.

> David does not own shares in any of the companies mentioned.