Is Lloyds Banking Group PLC A Promising Capital-Growth Investment?

LloydsLots of individual investors seem keen on the London-listed banks such as Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US). However, small investors like us don’t seem to enjoy much company from the big investment institutions, apart from that of The Solicitor For The Affairs of Her Majesty’s Treasury, at Lloyds. I think there’s a reason for that.

Hoping for capital gains

Perhaps the attraction is the hope of rapid share price appreciation as we saw recently with Lloyds. Those picking up a slug of the bombed-out shares below 25p during late 2011 saw them rise to 85p by early 2014, before they dropped back this year to today’s 73p.

That was Lloyds share price re-rating to factor in the firm’s business recovery, I reckon. For the year to December 2011, Lloyds posted a £3,542 million loss but, with the accounts to December 2013, there was a profit of £415 million, so the forward-looking stock market anticipated a return to healthy profits and the share price responded. It was right. 2014’s profit seems set to come in at about £6,156 million.

The problem for those still betting on the potential for further share price gains is that Lloyds’ recovery seems to have already happened and the re-rating is behind us. City analysts following the firm expect earnings to grow just 7% for the year to December 2015, which feels like on-trend pedestrian growth under back-to-normal conditions to me.

A low rating seems assured

The forward P/E rating for 2015 is running at about nine. That seems fair. Banks don’t deserve a high rating mid-macro-economic cycle. When we get back to ‘normal’ trading conditions, such as now, I’d argue, the forward-looking stock market keeps its foot off the gas when it comes to valuing the banks. At least it should do because they are cyclical beasts to the core. Profits rise and fall in tune with general economic conditions and profitability could dive at any time.

With such risk, it seems unlikely that Lloyds will see a racy P/E rating in double figures, as we might expect with a growth company. In fact, I’m betting on the opposite happening — that the P/E rating will fall as profits gradually rise, and as the current macro-cycle unfolds. I’m betting on that happening by avoiding the shares of banks such as Lloyds at the moment.

What now?

I think Lloyds Banking Group looks unattractive, but we all need to make our own investing decisions. That said, considering a range of views about investing can be informative and pay off best.

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