At A Five-Year High, Is Lloyds Banking Group PLC A Buy?

Lloyds Banking Group PLC (LON:LLOY) has surprised the market on Friday and, if performance trends are confirmed, it could be a great opportunity at this price, argues Alessandro Pasetti

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Lloyds (LSE: LLOY) (NYSE: LYG.US) is rallying hard in the wake of strong first-quarter results on Friday — but is it a buy right now or should you take profit if you are invested? 

At 83.17p, the stock hovers around its five-year highs (price as of 13.40 BST). 

A Clean Bank 

I have been bearish on Lloyds for a long time, but there’s something I really liked today in its quarterly update: it looks like Lloyds could be on the verge of becoming a good bank, one with a clean balance sheet. 

One swallow does not a summer make, but if the bank can confirm these trends by reporting healthy financials in future, it could certainly surprise many bears in the market. 

At a time when most banks have to set aside more capital to cover hefty losses related to litigation and similar affairs — just as Royal Bank Of Scotland and Barclays showed this week — a brave investor could stick its neck out and bet on a price target of between 90p and 100p a share. 

Last time Lloyds hit those levels was at the end of 2008, soon after the collapse of Lehman Brothers. So, was I wrong

A Message For The Bears

Of course, the 7.4% surge in its stock price at the time of writing was unexpected, and I do not believe its current valuation is sustainable, but since its rivals have been under pressure this week, while Lloyds is rising high to its record for the past five years, it certainly needs more consideration — its financials suggest so, at the very least. 

Net income margin is improving, earnings per share are growing, return on equity is comfortably in the mid-teens, and core capital ratios have risen. 

Furthermore, its underlying profit at about £2.2bn rose 20% compared to the first quarter of 2014, while its economic performance was hit to the tune of £660m, a loss that was widely expected and was due to the de-consolidation of TSB

Too Good To Be True? 

It may be time to revisit the investment case, and “return of capital could be the trigger,” one broker in the City told its clients today in the wake of upbeat results. 
 
I think such talk is premature, but if Lloyds continues to show that it’s different from its rivals and has actually cleaned up its act, then I could be proved wrong. 
 
There are still two problems: its valuation is too high, based on benchmark trading multiples for banks such as price to tangible book value; while the UK government still owns a stake of about 20% and it aims to sell it down over time, which would put pressure on the stock. 
 
Moreover, its yield is way too low to attract my interest, and I still believe forecasts for growth in earnings and dividends are way too bullish. 

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.

Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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