Bash Street Kid
There’s no doubt which big UK bank has been the major share price winner over the past 12 months. Step forward, Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US), whose share price is up 64% in the year. That means it has thrashed Royal Bank of Scotland Group (up 9%), Barclays (down 11%) and HSBC Holdings (down 12%). Lloyds really is the basher of the banks. So how has it done it?
Investors in Lloyds have enjoyed a terrific couple of years. The share price is up 140% in that time, which makes it easy to forgive the fact that it still doesn’t pay a dividend. The group has just posted a pre-tax statutory profit of £415 million for 2013, against a £606 million loss in 2012. Markets like nice surprises, especially when they come in the form of £6.2 billion adjusted profits, which were more than 6% ahead of analyst forecasts. Bash on!
Homeward Bound
Lloyds has also been simplifying its sprawling operation, and its tighter focus on the UK economy now looks more of a benefit than a burden. It disposed of £34.9 billion worth of non-core assets last year, boosting profits and offloading toxic operations. It has quit 22 countries since 2011, ahead of schedule, and now operates in just nine lands. That means it has far less exposure to troubled emerging markets than, say, HSBC. It still has to deal with plenty of overhang from the crisis years, for example, it has now set aside £10 billion for PPI mis-selling claims, but I’m hoping past indiscretions will slowly be forgiven and forgotten.
With its UK retail banking focus, Lloyds has been one of the biggest beneficiaries of the Funding for Lending Scheme. The FLS has since been withdrawn for residential mortgages, but the UK housing market continues to power forwards, with prices up 2.4% in February, according to latest Halifax figures.
Gross mortgage lending leapt 38% over the past year, according to the British Bankers’ Association, which again, should help Lloyds. I don’t expect the first base rate hike for another year at least, and rates should rise only slowly after that, protecting Lloyds’ customer base. Mortgage arrears have fallen lately. If you buy into the UK recovery, you may also want to buy into Lloyds.
Bash Out The Cash
Lloyds has been as much of a trade as an investment in recent years. Those days are drawing to an end. The fast money has been made, I’m afraid, and Lloyds will struggle to bash its rivals in the years to come. I’m hoping it will slowly revert to its steady long-term state, of a quiet, reliable income generator. By December 2015, the market is expecting it to yield 4%. You can buy into that on a modest forward price/earnings valuation of 11.2 for December 2014. Then you can sit back and watch it bash out the dividends, year after year.
