Forget PPI, Lloyds Banking Group PLC Is Starting To Look Like A Buy

Former sceptic Roland Head now rates Lloyds Banking Group PLC (LON:LLOY) as a buy.

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Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US) is making headlines again, with news that it has been exploiting a regulatory loophole to short-change PPI compensation claimants.

Although this won’t help the bank’s PR problems, I see this as short-term noise that won’t have any material effect on the eventual cost of the PPI scandal, or on the improving outlook for Lloyds shareholders.

Brighter outlook

Earlier this year, I questioned Lloyds’ valuation, and suggested that the share price had got ahead of itself. The market seems to have come round to my point of view, as Lloyds shares are down by nearly 10% from their January peak.

LloydsBetter still, now that we’ve seen the bank’s 2013 results, we’ve got a much better idea of what to expect in 2014 — and it’s not looking bad at all. Lloyds’ underlying profits rose by 140% to £6.2bn in 2013, while its balance sheet started to look stronger, too.

The results were broadly in line with expectations and have enabled analysts to firm up their forecasts. Current consensus figures suggest earnings per share of 6.9p and a dividend payout of 1.57p in 2014, placing the shares on a 2014 P/E of 11.4, and giving them a prospective yield of 2.0%.

Lloyds’ target is to pay out 50% of ‘sustainable earnings’ as dividends, which suggests that the bank’s 2015 payout could rise to around 3p — giving a tasty 3.8% prospective yield for next year.

PR problems

Lloyds may encounter some short-term PR issues this week, as news that its top management is sharing bonuses worth up to £27m, comes on top of a BBC report revealing the bank is using a loophole in the regulations to compensate PPI claimants for cheaper policies than those they actually bought.

Although unfortunate, I don’t expect these issues to make a material difference to the bank’s business outlook. Indeed, if these reputational issues do impact the bank’s share price, then I would treat them as a potential buying opportunity.

Is Lloyds a buy?

Lloyds’ current price looks pretty reasonable to me — the bank’s forward P/E of 11 is undemanding, while this year’s expected 2% yield is a good starting point.

However, markets tend to overshoot on the way up, and undershoot on the way down. I’ve got a hunch that Lloyds shares might still fall a little further — and if they do get closer to 70p, they would be a cracking buy, in my view.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland does not own shares in any of the companies mentioned in this article.

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