Why I’ve Bought Lloyds Banking Group PLC

Anyone who bought Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US) at the beginning of the year would now be sitting on a very good profit. This bank has been perhaps the contrarian pick of the year. Yet I feel that this bank’s share price will push on further ahead next year, too.

This is because I see the banks as a long-term contrarian play. Indeed, my viewpoint is not just over next year, but over the rest of the decade.

The trends all favour Lloyds

Here are the trends: bank profits are recovering as the economy improves and companies increase profits. Bad debts are steadily being reduced, month by month and year by year, and cleared from the balance sheet.

The housing market is warming up far more quickly than anyone had expected, moving from slump to normality and soon boom. You see the signs of recovery in improving housebuilder profits and rocketing house prices. Lloyds, as Britain’s biggest mortgage provider, is very well placed to benefit from this.

We have been used to a reality of rock-bottom interest rates for what seems like an eternity. But interest rates will eventually rise — and I suspect it will be sooner than you think. I think Mark Carney’s advice to house buyers to seriously consider whether they could afford their mortgage was not some throw-away remark. At some point interest rates and mortgage rates will rise.

In fact, I’m hopeful that we will be soon saying there was no such thing as ‘the new normal’. Once interest rates rise, bank profits will balloon.

And a final, less tangible trend

And there is another, less tangible but still crucial, trend: warming investor sentiment in banks. Mainstream investors are only now taking to the banks as investments to be included in pension funds and unit trusts. Improving institutional and private investor sentiment will further boost bank share prices.

There will doubtless be many ups and downs and twists and turns still ahead, but I reckon that by the end of this decade Lloyds Banking Group will be one of the most valuable companies in the FTSE 100. That’s why I’ve bought it.

Our guide to investing in banks

If you are thinking about investing in Lloyds Banking Group and other financials, then you might be interested to hear that our panel of investing experts has put together a new guide to investing in banks.

The banks have been perhaps the most controversial investments of recent years. Tarnished by the Credit Crunch and the Great Recession, are they now worth investing in? Well, just read our new report "The Motley Fool's Guide To Investing In Banks" to learn more. It is available without obligation and is completely free.

> Prabhat owns shares in Lloyds Banking Group.