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Can Lloyds Banking Group PLC Hit Brokers’ 81p Price Target?

Brokers’ consensus forecasts can be a useful tool for private investors, as they provide an indicator of what large institutional investors are expecting to happen over the next 6-12 months.

Over the last three months, brokers have increased their 2013 earnings forecast for Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US) by 5.6%, to 5.24p per share, while broker’s 2014 forecasts have increased by 9.6%, to 6.92p per share.

This leaves Lloyds trading on a 2013 forecast P/E of 14.4 and a 2014 forecast P/E of 10.9 — both of which are quite undemanding.

The current consensus price target for Lloyds is 81p, which is 7% higher than the bank’s current 75p share price. Having taken a closer look at Lloyds’ third-quarter results, I think this is completely realistic — and may even be too low.

Falling loan losses

Lloyds made its fair share of dodgy loans during the boom years, but the bank seems to have got things under control. The bank’s impairment (bad debt) charge fell by 44% from £4.4bn to £2.5bn during the first nine months of this year, as non-core assets — including most of the bank’s bad loans — were sold off.

Bad debt in Lloyds’ core business also fell, and accounted for just 0.39% of Lloyds’s total loan book at the end of the third quarter, down from 0.42% at the same time last year.

Cost-cutting

Lloyds is working hard to cut costs and streamline its business, based on a UK-only retail and SME banking model.

Lloyds reported annual cost savings of £1.3bn from its Simplification programme at the end of the third quarter, up from £468m at the end of 2012. The bank is targeting total annual cost savings of £1.9bn by the end of 2014.

These ongoing cost-savings should help to provide a sustainable increase to the bank’s net interest margin, which has risen from 1.94% to 2.17% during the first nine months of this year.

Expanding loan book

Of course, cost-cutting is useful, but it can only go so far. Genuine growth requires an increase in lending volumes, and Lloyds is delivering in this area, too.

The bank’s core loan book grew by £4.7bn to £430bn during the last quarter, mostly because of an increase business lending. Lloyds also reported a return to growth in retail mortgage lending over the same period, helped by more buoyant housing market conditions.

Is Lloyds a buy?

I believe that 81p is a realistic target and rate Lloyds as a buy, but you don't need to take my word for it.

In a brand new Motley Fool special report, the Fool's banking experts have calculated six key valuation and performance ratios for each UK bank, enabling you to compare Lloyds directly to its peers.

If you own Lloyds shares, I strongly recommend you take a closer look at "The Motley Fool's Guide To Investing In Banks" -- it's completely free and without obligation, so just click here to download your copy now.

> Roland does not own shares in Lloyds Banking Group.