Shares of Lloyds Banking Group (LSE: LLOY) have lagged the FTSE 100 by nearly 10% so far this year.
At the time of writing, the shares were changing hands for just 62p. That’s 69% less than the 200p share price last seen in 2008, just before the financial crisis caused banking stocks to collapse.
Today I’m going to look at the group’s financial progress over the last five years. I’ll explain why the share price hasn’t recovered. And I’ll give my view on whether a 100p+ price tag is likely in the near future.
So far, so good
There’s absolutely no doubt that Lloyds has made a lot of good progress since the dark days of 2008, when the bank received a £20bn bailout from UK taxpayers.
The bank’s recovery really got under way in 2014, when pre-tax profit rose from £415m to £1,762m. By 2017, this figure had risen to £5,275m. The dividend also rose quickly over this period, climbing from 0.75p per share in 2014 to 3.05p per share last year.
This recovery has been helped by stable economic conditions and government support for the housing market. The result has been strong demand for mortgages, credit cards and loans.
Lloyds has controlled costs well and its profitability has improved. The group’s return on tangible equity (RoTE), a key measure for banks, has risen from 4.4% in 2014 to 8.9% in 2017. During the first half of 2018, RoTE rose to 12.1%. That’s an impressive increase, if it can be sustained.
What could possibly go wrong?
Is the market missing a bargain with Lloyds? A number of high-profile investors, such as fund manager Neil Woodford, rate the bank as a buy.
But there are risks. Banking is heavily cyclical and as my Foolish colleague Rupert Hargreaves explained recently, there are signs that UK consumer debt could be reaching problem levels.
Lloyds’ focus on UK retail banking has made it simpler and more profitable than some rivals. But it does mean that in a recession, the firm could see a big reduction in demand for new borrowing, together with a rise in bad debts.
Worryingly, the bank’s impairment charge rose to £456m during the first half of 2018, nearly double the £256m reported for the same period last year. Management said that this was due to the inclusion of the MBNA credit cards business and certain other changes, but I think this is a figure that needs watching carefully.
Will we see 200p by 2020?
When PPI compensation finally comes to an end in August 2019, Lloyds expects to have paid out more than £19bn in compensation. Removing this drag from the business should improve shareholder returns.
Hopefully, the economy will remain stable after Brexit and Lloyds’ profits will keep ticking higher.
Unfortunately, I think the chance of the shares reaching their pre-bailout level of 200p is pretty low. Billions of new shares were issued as part of the bailout, diluting existing shareholders. The bank’s balance sheet and business have also changed significantly since before 2008.
I think we need to judge Lloyds on the picture today, regardless of its history. My view is that the stock is attractively priced for income buyers, at 1.2 time’s tangible net asset value and with a forecast dividend yield of 5.6%.
I’d be happy to buy at this level, but I wouldn’t expect rapid share price growth.
