Shares in Lloyds (LSE: LLOY) (NYSE: LYG) have made a great start to 2015, with them having risen by 15% since the turn of the year. This is an impressive performance for a few reasons.
Firstly, sentiment towards banking stocks in general has been rather weak, with allegations of wrongdoing and potential fines continuing to provide a challenging backdrop for the sector. Secondly, the government is continuing to drip-feed its stake in Lloyds into the market, which could create downward pressure on the bank’s share price. And, finally, there was considerable uncertainty ahead of the General Election regarding what a Labour-led government would do with its stake in the part-nationalised banks.
Upward Rerating
Despite its strong share price performance, though, Lloyds continues to offer excellent value for money. For example, it trades on a price to earnings (P/E) ratio of just 10.7, which represents a huge discount versus the wider index.
Clearly, Lloyds has tremendous potential for a substantial upward rerating and, looking ahead, this is very much on the cards. As mentioned, the government’s sale of its stake is unlikely to last for more than a couple of years and, once this is completed, investor sentiment in Lloyds could gain a boost.
That’s because Lloyds may no longer be seen as a bank that is being aided by the government and is able to be an independent entity once more. Certainly, Lloyds is now very profitable and has recommenced dividends, but the state-aid badge remains and its removal may cause investors to bid up the bank’s share price.
Cost Control
Additionally, Lloyds appears to be in a better position that most of its peers regarding its cost base. Unlike the banking sector in general, Lloyds has been able to keep costs to a minimum and, looking ahead to its longer term future, this should serve it well in a climate where a rising interest rate may cause demand for new loans to be squeezed somewhat from their present level. As a result, Lloyds’ bottom line should show a healthy growth rate over the medium to long term and act as a positive stimulus on its share price.
Strategy
Meanwhile, Lloyds remains a very sound financial institution. In recent years its strategy of selling off non-core assets so as to focus on other divisions that offer a more appealing risk/reward profile has been a very successful one and has turned the bank’s financial performance around. Now Lloyds looks set to benefit from reduced provisions for PPI claims, as well as less onerous asset writedowns as the UK and global economies continue to strengthen. And, with interest rates set to remain low over the medium term, Lloyds’ financial performance should remain strong.
Looking Ahead
So, with a number of potential catalysts and very impressive financial performance, there seems to be little reason why Lloyds trades at such a discount to the wider sector. And, while its shares have performed well this year, now is a great time to buy a slice of one of the best value stocks on the FTSE 100.
