Why I Might Buy Lloyds Banking Group PLC

In the years after the Great Recession financials, such as insurers, brokers and particularly banks, have been one of the contrarian plays of the moment.

Beaten down by a combination of the credit crunch, the general crash in equities and a rush out of financial shares, these companies have been bargain basement.

As things have generally improved, so bank shares have been recovering, and the share price of Lloyds Banking Group (LSE: LLOY) has more than doubled.

Long-term thinking

Normally, when a share price doubles you think of selling the shares, not buying them. And many people would say that Lloyd shares look toppy at the moment because of that.

But to say that is to confuse short-termism with long-term thinking. Take a step back and see the share price charts over the past decade. The simple numbers show that six years ago the Lloyds share price had risen to 580p. In the great bull market of the 1990s it reached as high as 1,000p.

The current share price is 73p — a mere fraction of the price before the credit crunch. Seen in the round, the share price is just bumping along the bottom.

I am not saying the share price will rebound to its pre-credit crunch heights. But I certainly think it has much more scope for recovery.

The company’s latest results bear this out. The bank’s underlying profits in the six months to the end of June have bounced up from £1.86bn to £2.90bn.

Crucially, the balance sheet is steadily being cleared of toxic assets, with bad debts falling by 43%. The company is aiming for a core tier 1 ratio of over 10% by the end of the year.

A virtuous cycle

The road to recovery, if not to boom, is clear. Though that’s not to say there won’t be bumps along the way. There are still payments being made because of the PPI scandal, though these are diminishing.

The bank continues to be simplified and streamlined, with customer service being improved. Customer satisfaction is increasing, and complaints are falling.

The improving picture is similar with RBS and Barclays, and indeed other financials such as insurers and brokers: think of RSA and Tullett Prebon. As the numbers improve, the whole of the financial sector is entering a new virtuous cycle of increasing profits, increasing share prices and increasing confidence.

What a change from the vicious cycle we had a few years ago of huge losses, crashing share prices and a mood that was nothing short of funereal.

For all these reasons, I rate Lloyds Banking Group a buy.

Foolish final thought

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> Prabhat owns shares in Barclays, RSA and Tullett Prebon, but in none of the other companies mentioned in this article.