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Is Lloyds Banking Group plc Set For Electrifying Earnings Growth In 2014?

Today I am looking at British banking giant Lloyds Banking Group’s (LSE: LLOY) (NYSE: LYG.US) earnings prospects for 2014.

An outstanding banking bet

Lloyds hit the headlines for all the wrong reasons again last week as it was dragged over the coals for fresh mis-selling practices. The bank was forced to shell out a record £28m by the Financial Conduct Authority (FCA) for placing staff under severe pressure to hit sales targets or face demotion or salary penalties. The bank could now face claims running into the hundreds of millions from customers who were mid-sold products as a consequence.

This comes on top of long-running revelations related to to the questionable sale of payment protection insurance (PPI) policies in recent years — for which the bank set aside an additional £750m during July-September, taking the total provision to £8.03bn — and interest rate hedging products and LIBOR-fixing allegations. The prospect of heavy financial penalties from previous mis-selling scandals looks set to bedevil Lloyds well into the new year.

Still, in better news for 2014, Lloyds continues to enjoy improving conditions in the housing market, helped by rising house price inflation and its participation in the government’s ‘Help To Buy’ scheme. Latest British Bankers’ Association (BBA) data showed net mortgage lending, on a seasonal basis, advance £787m in October, the best monthly performance for more than a year and a half. And the value of new mortgage approvals for home transactions increased 19% from September, rising to £7.9bn, the highest value since September 2007.

In addition, the company’s cost-cutting and restructuring plan also continues to move along at a blistering pace, and Lloyds confirmed in October that it is on track to cut non-retail non-core assets to £26bn by end-2013 and £15 billion by the close of next year.

The City expects Lloyds to follow this year’s earnings per share bounceback with another solid performance in 2014. Analysts have pencilled in earnings of 5.3p per share for 2013, following losses of 2p per share last year, and expect earnings to tread 29% higher in 2014 to 6.8p.

These projections leave Lloyds dealing on a P/E multiple of 11.1 for next year, beating a forward average of 16.5 for the entire banking sector and moving closer to the bargain yardstick of 10 times predicted earnings. And a price to earnings to growth (PEG) reading below 1, at 0.4, undergirds the firm’s stunning value relative to its earnings prospects.

Of course Lloyds continues to suffer from the financial implications of various legacy issues, while a downturn in the still-fragile economy could weigh on the bank’s fortunes in 2014 and beyond. But in my opinion a more streamlined, UK-focussed bank is in great shape to enjoy improving earnings prospects next year and beyond.

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Royston does not own shares in Lloyds Banking Group.