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Has The Lloyds Banking Group PLC Recovery Run Out Of Steam?

Lloyds

If you bought Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US) at the right time, you would have had a lot of fun with this stock. It soared from 25p in June 2012 to a peak of 85p a mere 18 months later, a blistering return of 240%.

But this year the steam train has run out of coal. The share price is down 7.5% since January, well behind the flagging FTSE 100, which fell 1.5%.

Now reports suggest that Chancellor George Osborne has dropped plans for a multi-billion pound sale of shares in Lloyds this year, and the sell-off may even be postponed until after next May’s general election.

The sliding Lloyds’ share price, and stock market volatility in general, make this a politically risky privatisation, far too close to polling day for comfort.

But Osborne’s wariness can be seen as another sign that the Lloyds recovery has run out of steam, for now.

Happy At Home

The slowdown is hardly surprising. No stock of this size can maintain such blistering growth for long. Yet there are good reasons for thinking Lloyds can pick up the pace again.

Its recent half-year results bolstered confidence, with a 32% rise in underlying profits to £3.8bn. Impairment charges plunged 58% to £758m, while underlying costs fell 2% to £4.67bn.

Some investors have shied away from Lloyds because of its relatively high exposure to the UK retail market, in contrast to the international focus of most London-listed big banks.

But with the UK economy forecast to rise 3.5% this year, that is working in Lloyds’ favour right now.

Challenging Times

Like most of the big banks, Lloyds is still struggling to hit escape velocity. It has just been hit with a £218m fine for fiddling LIBOR, and been forced to set aside more PPI mis-selling provision than any other bank, at £10.4bn.

It also faces tougher competition for its current account business from domestic challengers, which include FTSE 100 names such as Tesco and Marks & Spencer, alongside Virgin, Metro and Lloyds’ spin-off TSB.

An investigation by the Competition & Markets Authority into the personal current account market will cast a shadow over the next 18 months, as it could ultimately force a break-up of the big banks.

In any case, there is growing City talk that the days of the globally sprawling big bank are over. To a degree, Lloyds has already bowed to the inevitable by retrenching to the UK.

Investors need to trim their expectations accordingly.

Dividend Dreams

But there are still tempting reasons to buy Lloyds. Trading at a forecast 9.7 times earnings for December, it is cheaper than Barclays, HSBC Holdings and even Royal Bank of Scotland, which trade at a forecast 10.4, 11.9 and 12.7 times earnings respectively.

Lloyds may apply to the Prudential Regulatory Authority to restore its dividend later this year, and markets are forecasting a yield of 4.4% by December 2015.

Now could be a good time to buy into that growing income stream.

I don’t expect Lloyds to surge ahead in the next few months. The shadow of any state sell-off is still hanging over it, and the UK recovery looks set to slow.

But over the years it should still build up a nice head of steam. Recent slippage could make now a good time to hop on board.

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Harvey Jones has no position in any shares mentioned. The Motley Fool owns shares in Tesco. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.