Shares in Lloyds Banking Group (LSE: LLOY) are flat today after the bank reported a mixed set of half-year results. Although pretax profit for the half year to the end of June increased by 38% to £1.2bn, it missed market expectations by some distance, with investors apparently anticipating a profit of £1.9bn. The key reason for the bank missing its guidance was an additional payment protection insurance (PPI) provision of £1.4bn, which takes Lloyds’ total provisions for the apparent mis-selling to over £13bn.
And, while Lloyds has seen a decline in the number of complaints for PPI mis-selling, the rate of decline has been slower than expected and, realistically, it seems likely that further provisions will be made in future. In fact, while Lloyds expects complaints to fall significantly in the next couple of years, further provisions of £1bn this year and £2bn in 2016 could be required if there is no tailing off of claims for PPI in that period.
Of course, there is a lot for investors in Lloyds to feel upbeat about, too. For example, the bank has been able to reduce its cost:income ratio still further, with it falling by 0.7% to 48.3%. It remains one of the most efficient banks in that respect, which bodes well for its future profitability. Furthermore, impairment charges for the quarter fell by 75% to £179m and, with Lloyds feeling more confident about its future and the economic environment in which it operates, it is focused on increasing its dividend payout ratio to 50% over the medium term.
In addition, Lloyds has today set out a plan to return excess capital to its shareholders via either special dividends or share buybacks. As such, the bank is beginning to hold greater appeal for income-seeking investors, with an interim dividend of 0.75p per share being confirmed in today’s results.
Meanwhile, the government’s stake in the bank has been reduced to less than 15% and today’s results show that, while Lloyds is still enduring challenging legacy issues (notably PPI), its underlying performance is very strong.
Looking ahead, its shares are likely to benefit from improving investor sentiment, with the expected reduction in PPI provisions a clear catalyst to push Lloyds’ share price higher. And, with it trading on a price to earnings (P/E) ratio of just 10.4, there is tremendous scope for an upward rerating. In fact, Lloyds could see its share price rise by up to 50% over the medium term and still not be considered overvalued.
In addition, Lloyds is clearly becoming even more shareholder-friendly, with its dividend policy providing investors with the prospect of a generous income return in the long run. In fact, Lloyds is expected to yield around 4.8% next year and, with the addition of potential special dividends, payouts to its investors could be even higher.
And, with the UK economy continuing to improve and deliver strong growth numbers, Lloyds looks all set to post exceptional returns in the medium to long run. Certainly, more pain regarding PPI claims is likely, but it will not last forever and, as such, now could be a great time to buy Lloyds while its share price is still very, very cheap!
