Why Lloyds Banking Group PLC’s Simplification Strategy Should Bolster Growth

Royston Wild evaluates what Lloyds Banking Group plc’s (LON: LLOY) divestment strategy are likely to mean for future earnings.

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Today I am looking at why I believe Lloyds Banking Group‘s (LSE: LLOY) (NYSE: LYG.US) streamlining programme should turbocharge earnings expansion.

Divestments keep on rolling

In recent days the government reduced its holding in the bank for the second time in six months, leading to speculation that Lloyds will be fully privatised by next year’s general election. The taxpayers’ stake in the business now stands at 24.9% compared with 32.7% prior to last week’s sale, and underlines the government’s confidence that the bank is now on the straight and narrow.

Lloyds has embarked on a strict cost-cutting and divestment drive in order to create a smaller, more efficient and low-risk and UK-centric bank.Lloyds The drive has proved hugely successful in repairing Lloyds’ battered balance sheet and finally put it back in the black, the business punching its first pre-tax profit for three years at £415m last year.

Following a spate of share reductions in St James’s Place, Lloyds finally divested its entire interest in the wealth management specialists in December by selling its remaining 21% stake for approximately £680m. The move boosted the bank’s common equity tier 1 (CET1) capital ratio to the tune of 24 basis points, and the firm’s ratio now stands at a healthy 10.3%.

The company noted in February’s finals that it had slashed non-core assets by a colossal £34.9bn in 2013, to £63.5bn, and the company remains active in shedding its non-essential items to bolster the balance sheet. More specifically, the firm aims to reduce non-core non-retail assets to around £15bn by the end of this year alone, down from £24.7bn at present.

Lloyds shed off more non-core assets in March, with the £235m sale of a portfolio of European commercial real estate loans to MELF S.à r.l. The bank has embarked on similar transactions in recent months, having hived off portfolios of non-performing Irish retail mortgages and UK corporate real estate loans for £257m and £90m respectively back in December.

Earnings expected to ignite from 2014

Although Lloyds has posted full-year losses in each of the past four years, City analysts expect the bank to turn the corner this year, with earnings of 7.3p per share following 2013’s 1.2p per share loss. And forecasts point to a further 9% advance, to 8p per share, in 2015.

These figures leave Lloyds dealing on P/E multiples of 10.4 and 9.6 for 2014 and 2015 correspondingly, nipping below the value watermark of 10 times forward earnings and comfortably outstripping a prospective average of 17.2 for the complete banking sector. In my opinion a streamlined Lloyds is an excellent stock proposition for those seeking solid growth at a reasonable price.

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.

Royston does not own shares in Lloyds Banking Group.

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