Why, oh why, did I sell Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US) two years ago? The moment I cleared the decks, it took off. It has flown 205% since then. Clearly, it wasn’t a ‘sell’ in December 2011. But is it still a ‘buy’ today?
When I sold, Lloyds was a caged and wounded beast, taunted and baited by the mob, but it is tearing free of its shackles. It has cast off its non-core assets, bolstered the balance sheet and boosted margins. Group underlying profits hit £1.52bn in Q3, up 83% in a year. It also cut its impairment charges by 44% to £2.48bn, and knocked an extra 6% off its costs. Investors have enjoyed a roaring time.
I don’t expect another 200% growth in the next two years. No company this size can maintain that pace for so long. I am worried that Lloyd’s decision to exit dozens of countries to focus on the UK retail sector and SMEs leaves it heavily exposed to the domestic economy. Happily, the UK is leading the charge to recovery, led by a buoyant housing market, but there is growing anxiety about a potential housing bubble. When interest rates finally start rising, many over-stretched borrowers will struggle to service their mortgage repayments. Arrears could rise.
Challenger times
2014 should be fun, however, with the British Chamber of Commerce forecasting GDP growth of 2.7%. But retail banking competition is getting tougher with a host of challenger banks, led by high-street retail giants Marks & Spencer and now Tesco, which has just announced its first current account. With switching between accounts now much easier, Lloyds will have to raise its (and maintain) its game.
Naturally, Lloyds is still riddled with controversy. It has been hit with fine after fine after fine, of which the latest is a £28 million penalty, the biggest the Financial Conduct Authority has ever imposed on a retail bank, for its aggressive bonus scheme that incentivised staff to sell unsuitable products. Complaints against the bank have fallen, however, as the stock of PPI claims works through the system. Libor rigging, mis-sold interest rate swaps and PPI still cast a shadow over the bank, but shouldn’t prove fatal to the share price.
Bad for good
Profits are back, now all we need is the dividend. The recent sale of Lloyds’ 21% stake in wealth management firm St James’s Place, its third asset sale in three days, has given its tier 1 capital ratio a £685 million boost and raised hopes of an early return to the dividend. Consensus forecasts suggest earnings per share (EPS) growth should hit 30% by December 2014. The yield is on a forecast of 2.9% for that day. Investec has just lifted its target price from 80p to 84p. Today, you pay 76p. These numbers suggest Lloyds is still a buy. It may no longer be a short-term growth monster, but it should be a long-term dividend machine.
