How Lloyds Banking Group PLC Is Changing

LLOYSuccessful companies don’t stand still. They’re always evolving. Today, I’m looking at the changes taking place at Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US) — and what they mean for investors.

For many years, Lloyds had a reputation as a conservative bank that looked after its shareholders with a nice dividend income. The reputation — and the dividend — went up in a puff of smoke during the 2008/9 financial crisis, when the Black Horse took over failing rival HBOS with indecent haste, inadequate due diligence and government pressure.

Road to recovery

Current chief executive António Horta-Osório took the reins from old-guard boss Eric Daniels in March 2011. Horta-Osório has steered Lloyds steadily along a road to recovery that has enabled the government to sell down its 43% bailout stake in the bank to 25%.

Dealing with legacy issues, selling off assets and major restructuring have been the order of the day. But Horta-Osório still has some changes to make in shaping a final go-forward Lloyds, fully back in the hands of private investors.

Home straight

Lloyds reported impressive first-quarter results last week. Underlying profit soared 22% to £1.8bn, as the company’s net interest margin improved from 1.96% to 2.34%; and the Board upped previous guidance on the full-year margin to 2.4%. We also saw a 57% reduction in impairment charges and a further strengthening of the group’s capital position.

The capital position will also be boosted when Lloyds divests its 631-branch-strong TSB business. This disposal was a condition of the state support Lloyds received during the financial crisis.

A deal to sell the branches to the Co-operative Bank having fallen through, Lloyds is now planning to begin the disposal of TSB with a float of a 25% stake in the business (valued at around £1.5bn) on the London Stock Exchange this summer.

Analysts reckon that Lloyds’ multi-year sell-off of assets to strengthen its capital position will essentially be over by 2015. Horta-Osório himself said in the recent results:

“Our priority is now moving from reshaping and strengthening the Group, to further simplifying it and maximising our growth potential, to ensure that we continue to create sustainable value for both our customers and our shareholders”.

The shift of emphasis is embodied in Lloyds’ new ‘Helping Britain Prosper Plan’, which is all about meeting customer needs and delivering customer service.

What does the future hold for investors?

It is widely thought the government will complete the sale of the taxpayer’s stake in Lloyds in time for next year’s General Election. And with Horta-Osório expecting to apply to the Prudential Regulation Authority later this year to restart dividend payments, we could see a small final dividend when Lloyds announces its annual results next February.

The analyst consensus is for a 1.5p dividend — a yield of under 2% at Lloyds’ current share price of 80p — but rising to 3.33p (4.2%) for full-year 2015. Thereafter, the Board should be in a position to pay out around 70% of the bank’s earnings to shareholders every year.

The rehabilitation of Lloyds to a traditional, UK-focused, low risk and low cost bank, rewarding its shareholders with a nice dividend income, would be complete.

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G A Chester does not own any shares mentioned in this article.