With shares in Lloyds (LSE: LLOY) (NYSE: LYG.US) having risen by 124% in the last three years, it is perhaps understandable that many investors are uncertain about the bank’s future prospects. After all, such a staggering gain could mean that shares in Lloyds are somewhat overvalued and, with the General Election coming up, there is undoubtedly a degree of uncertainty surrounding the bank’s immediate future.
However, Lloyds continues to offer superb potential as a long-term investment and appears to be worthy of a place in your ISA for these three reasons.
Strategy
Put simply, Lloyds has a superb strategy to increase its bottom line over the medium to long term. Of course, this has not happened overnight and, over the last handful of years, the current management team has worked hard to identify the most profitable and least risky parts of the business. Those that were viewed as either too risky or too unprofitable have been deemed ‘non-core’ and sold off (or are in the process of being sold off) which, despite being a somewhat arduous effort, seems to have been well worth it, since Lloyds is now very much back in the black and was able to make its first dividend payment since the start of the credit crunch last year.
Improving Trading Conditions
Although low interest rates mean that the interest banks can charge on loans is less than they perhaps would like, it has three other very positive effects on their bottom lines. Firstly, it causes demand for new loans to increase, as consumers take advantage of a lower cost of borrowing. Secondly, it causes business confidence to improve, at least partly as a result of higher profitability due to lower debt servicing costs. Thirdly, it means there are fewer bad loans, with borrowers more easily able to pay interest while the cost of borrowing is lower. And, with interest rates set to remain low over the medium term, Lloyds and its banking sector peers could be in the midst of a purple patch.
Valuation
Despite having risen by 124% in the last three years, Lloyds still trades on a very appealing valuation. For example, while the FTSE 100 has a price to earnings (P/E) ratio of over 16 now that it has passed 7,000 points for the first time, Lloyds continues to trade on a P/E ratio of just 10 and this indicates that its share price could continue to move higher. As such, now appears to be a great time to buy a slice of it.
