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Why Lloyds Banking Group PLC Will Be One Of 2013’s Winners

I talked last week of how Royal Bank of Scotland (LSE: RBS) (NYSE: RBS.US) looked set to be one of the year’s winners, with its share price up 31% at the time.

But only days later, the bailed-out bank revealed it is not going to split but will instead ring-fence £38bn of high-risk assets, with impairments charges now set to leave it with a “substantial loss for the year“. And the share price plunged! It’s now barely 15% up over the past 12 months, lagging the FTSE.

The other one?

Now, the same couldn’t happen to Lloyds Banking Group (LSE: LLOY) (NYSE:LYG.US), could it? Surely Lloyds’ 80% share price rise over 12 months is safe and enough to usher it in with the year-end winners?

I do hope I’m not providing the kiss of death in saying that Lloyds is surely going to be one of the FTSE 100’s biggers winners this year, but I don’t see how it can fail now.

The thing with Lloyds is that its return to profitability is more advanced than at RBS, as the bank got last year’s pre-tax loss down to £570m — a lot of money to you or I, but relatively modest on the banking scale of things, and it actually hid an underlying profit. And Lloyds never reached the same levels of losses and bad debts as RBS in the first place.

The fundamentals

At the halfway stage reported on 1 August, Lloyds reported a statutory profit of £2,134m with an underlying figure of £2,902m. The firm recorded a 2.01% net interest margin (and predicted 2.10% by the end of the year), saw costs fall by 6% and, crucially, was able to report a 43% fall in impairments.

Non-core asset reduction progress was ahead of plan, with a reduction of £17bn at the time and a revised target of less than £70bn in non-core assets set for year-end — a year ahead of earlier expectations.

Compliance with the latest regulatory guidelines was looking good too, with a fully-loaded core tier 1 ratio of 9.6%, and that was expected to be boosted to better than 10% by December — again a year ahead of plan.

By the time Q3 ended, as reported on 29 October, underlying profit was up to £4,426m for the first nine months of the year, with a net interest margin up to 2.06%. Lloyds saw fit to boost its full-year guidance further, and is now expecting to see a net interest margin of 2.11% with non-core assets now predicted to be around £66bn.

The future

The Lloyds share price did suffer a bit of a setback earlier in the year, but since April it’s really shown no going back. And though the rise has put the shares on a forward P/E of 14.5 based on full-year forecasts, this is only its first year of profits since 2010, and a further earnings rise predicted for 2014 would drop that to a below-average 11.4.

There won’t be much in the way of dividends this year, but we could be seeing something close to a 3% yield for 2014 — and that’s worth having.

So, yes, I rate Lloyds a winner for 2013 — and this time I really don’t expect to have to revisit my opinion in a week’s time!

And finally...

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> Alan does not own any shares mentioned in this article.