Sector-Leading Ratio Marks Lloyds Banking Group PLC Out As A Buy

You may be surprised to hear that Lloyds (LSE: LLOY) (NYSE: LYG.US) has the best cost: income ratio in the UK banking sector.

This may or may not mean too much to you, my fellow Fool, but in my view it means that Lloyds is well worth buying as a result of its continued strong performance.

Indeed, the bank’s cost: income ratio was just 50% for the first half of 2013 and reflects a significant improvement on the same period the previous year when the equivalent ratio was 55% (the lower the figure the better).

This compares well to the bank’s peers, with HSBC targeting a cost: income ratio in the mid-50s, and Barclays and RBS still being someway off both of these two.

Of course, it may come as something of a surprise to hear that Lloyds is, on paper, the most efficient UK listed bank. However, it has been steadily reducing its costs and attempting to grow its revenue over the course of the credit crunch, with it now being translated into sector-leading efficiency figures.

However, top marks for a cost: income ratio are not the only reason for me being bullish on Lloyds.

Indeed, Lloyds’ share price chart points to a positive outlook, with shares coming off around 10% from their 2013 high of 78p. This, in my view, is a short-term fluctuation and shares have repeated a similar pattern over the course of the year: making higher highs before dropping off 5-10% and then continuing to make another new high.

So, I feel that shares are near the bottom of their short term range at present and this makes me more positive on the stock.

Looking further ahead, Lloyds should benefit from its size and scale in future years. Although new rules will make it easier to switch bank providers, it will still not be quite so easy and Lloyds, with its vast array of branches and service offerings, should benefit from a continued difficulty in changing bank account providers.

So, I’m encouraged by the efficiency that Lloyds is showing via its best-in-class cost: income ratio, with a sub-50% figure being on the cards in the medium term. Furthermore, the share price chart points to optimism, while the longer-term prospects look reliable and Lloyds should benefit from the switching costs involved in changing bank account provider.

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> Peter owns shares in Lloyds.