5 Metrics That Tell Me Lloyds Banking Group PLC Is A Buy

So far this year, shareholders in Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US) have seen the value of their shares fall by around 6%, while City analysts have simultaneously increased their earnings forecasts for the bank.

LloydsAs a result, Lloyds’ is starting to look cheap — and in this article I’ll show you five numbers that highlight why now might be a good time to consider buying into the Lloyds recovery story.

1. P/E ratio

Lloyds currently trades on a 2014 forecast P/E ratio of just 10.8.

That looks attractive compared to the FTSE 100 average of 15.3, and is in-line with most of its peers, except, inexplicably, Royal Bank of Scotland, which currently trades on an unappealing 2014 forecast P/E of 15.

2. Net interest margin

A bank’s net interest margin is a key measure of profitability, especially when, as with Lloyds, the majority of its business is bread-and-butter lending and deposits.

Lloyds’ net interest margin rose by 0.19% to 2.12% last year. This compares well with peers such as Barclays (1.84%), and suggests that Lloyds’ profits should rise steadily, as exceptional problems, such as PPI, fade away.

3. Dividend yield

Lloyds is hoping to be allowed to restart dividend payments this year, and current consensus forecasts suggest a payout of 1.5p for 2014, giving a prospective yield of 2%.

Looking ahead, Lloyds has committed to paying out 50% of sustainable earnings as dividends, and City analysts seem increasingly confident that this will happen, as they are forecasting a payout of 3.2p for 2015, which would give a prospective yield of 4.3%.

4. Attractive returns

Lloyds reported a return on risk-weighted assets — a key measure of profitability — of 2.14% in 2013, up from 0.77% in 2012.

Interestingly, Lloyds’ return on risk-weighted assets for its retail banking business was 4.11%. This highlights the strength of Lloyds’ core proposition; Barclays’ UK retailing banking business reported a return on risk-weighted assets of just 2.2% in 2013.

5. Strong balance sheet

Lloyds reduced its non-core (bad) assets by £35bn last year, to £63.5bn. While this is still a lot, I’m satisfied that Lloyds is making good progress in this area.

The success of Lloyds’ approach is visible in its balance sheet. The bank’s Common Equity Tier 1 ratio of 10.3% is substantially above the 7% minimum required by the regulator, and is stronger than both Barclays (9.3%) and RBS (8.6%).

Time to buy Lloyds?

We'll get an update on Lloyds' progress when the bank publishes its first-quarter update on 1 May, but in the meantime, if you are thinking about investing in Lloyds -- or any other UK bank -- I would strongly suggest you take a look at "The Motley Fool's Guide To Investing In Banks".

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Roland does not own shares in Lloyds Banking Group or Royal Bank of Scotland, but does own shares in Barclays.