Today I’m looking at the key items investors must consider before piling into banking colossus Lloyds (LSE: LLOY).
PPI pains
Make no mistake: the problem of crushing PPI-related penalties is likely to remain a millstone around Lloyds’ neck for some time yet.
The bank has so far stashed away an eye-watering £16bn to cover the cost of its previous mis-selling practices, including an extra £2.1bn provision for the fourth quarter of 2015. The latest charge topped the City’s worst estimates by some distance, including that of Barclays Capital, which earmarked a provision of between £800m and £2bn.
And the amount Lloyds will have to set aside is expected to accelerate ahead of the possible 2018 claims deadline floated by the Financial Conduct Authority.
‘Brexit’ fears loom large
Another huge shadow hanging over Lloyds is the prospect of the UK tumbling out of the European Union when the country goes to the polls in June.
Lloyds’ chairman Lord Blackwell has tentatively suggested support for Britain going it alone, but numerous blue-chip companies — including fellow banking giant HSBC — have lined up in recent weeks to voice their concerns over the economic impact of a departure.
Opinion remains divided over the potential fallout of ‘Brexit’, but a step into the unknown could have a devastating impact on Lloyds’ future profitability given its UK-focused footprint.
Poor growth prospects
But irrespective of the result of the European referendum, Lloyds isn’t expected to punch spectacular earnings growth in the years ahead.
While massive asset shedding has worked wonders in reducing the bank’s risk profile, not to mention slashing costs across the business, Lloyds’ subsequent reliance on the British retail segment is likely to significantly hamper the firm’s ability to generate bumper profits in the years ahead.
The City expects Lloyds to endure an 11% earnings slide in 2016, while a meagre 2% uptick is expected next year.
So is Lloyds a ‘buy’?
But while Lloyds’ bottom-line isn’t expected to take off any time soon, I believe the bank still offers terrific bang for your buck at current prices. Indeed, P/E multiples of 9.4 times and 9.1 times for 2016 and 2017, respectively, fall comfortably within ‘bargain basement’ territory of 10 times or below.
And for dividend seekers Lloyds could prove to be a particularly satisfying buy. The bank set aside £2bn for its shareholders last year, and with its CET1 ratio standing at a healthy 13% as of December, I believe the foundations are in place for payments to keep on expanding.
The number crunchers expect Lloyds to lift the dividend from 2.25p per share in 2015 to 3.9p this year, and again to 4.7p in 2017. Consequently Lloyds boasts huge yields of 5.4% and 6.5% for these years.
So while the costs of the PPI mis-selling scandal and the implications of a possible ‘Brexit’ loom large, I believe Lloyds remains a hugely-attractive banking pick at present prices.
