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The pros and cons of investing in Lloyds Banking Group plc

Image: Sandra Halliday

Today I am looking at the perks and the problems of investing in Lloyds Banking Group (LSE: LLOY).

Market mayhem

Stock pickers should be hugely worried by data since the start of 2017, a wide range of industry gauges showing a broad deterioration in the UK economy. Such a situation could see bad loans rise and revenues growth stall at Lloyds, a bank lacking significant foreign exposure to take the heat out of any cool-down at home.

Looking at the mortgage market specifically — a critical segment for Lloyds — latest data from the Bank of England should raise some concerns. This showed UK mortgage approvals falling for the first time in six months in February, fanning fears that homebuyer activity could be about to slip as inflationary pressures rise and purchaser uncertainty intensifies.

But this is not the only worry for Lloyds as competition rises in many of its markets. Focusing back on the home loans sector, for example, both Sainsbury’s and challenger Secure Trust Bank have moved in to challenge Lloyds in the past few weeks alone.

Cost-cutting rises

In this climate the need to save costs is clearly paramount, and through its long-running Simplification restructuring drive, Lloyds has managed to transform its balance sheet.

With its top-line outlook darkening, the bank has elected to step up its capital-preservation scheme, Lloyds announcing last summer it plans to raise its run-rate savings target from £1bn to £1.4bn by the end of 2017.

This will result in the closure of an extra 200 branches and the axeing of 3,000 jobs.

… but financial penalties mount

Whilst these measures have worked wonders in improving Lloyds’ capital strength (the bank’s CET1 ratio of 13.8% as of December is one of the best in the business), the steady capital drain caused by legacy issues will remain a headache for some time to come.

Lloyds was forced to put away an extra £350m in March to cover the cost of extra PPI cases. And with the claims deadline still two years away, investors should expect the bill to keep on rising. The bank has now stuffed £17.35bn into the mattress to cover the costs of the enduring saga.

The PPI scandal is not the only problem facing Britain’s banks however, and last week Lloyds set £100m aside to compensate customers who fell victim to six rogue HBOS traders between 2003 and 2007.

Delicious dividend yields

Still, the prospect of vast dividend yields (at least in the near term) means that Lloyds retains its sheen with many investors.

In 2017 the bank is expected to pay a 3.6p per share dividend, yielding 5.7%. And the yield shoots to 6.7% in 2018 thanks to a predicted 4.2p reward.

These vast figures would not be enough to tempt me to invest in Lloyds, however. With Britain’s upcoming EU exit threatening domestic economic growth long into the future, and the bank also set to keep grappling with hefty financial penalties through to the end of the decade at least, I reckon those hoping for chunky dividends persisting long into the future could end up disappointed.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.