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Why Lloyds Banking Group PLC Could Still Beat The FTSE 100 This Year

LloydsLloyds Banking Group (LSE: LLOY) (NYSE: LYG.US) has made a remarkable recovery, recording its first pre-tax profit last year since the £3.5bn loss in 2011, albeit a small one.

There are some very solid forecasts for the next two years too, with the City’s analysts suggesting £6.5bn for the year ending December 2014 followed by £7.6bn in 2015.

Yet despite all that, Lloyds shares are down 5% so far this year to 76.4p, while the FTSE has fallen by 4%. Lloyds has lagged a little, but with things so close there’s still time for the bank to beat the index by year-end.

Government reduction

Part of the fall this year has been because Lloyds actually had a strong bull run in late 2013 and early 2014, and some of what we see is just a little fall back from that. The UK government also off more of its stake of the bank, too, reducing its holding to 24.9%, and that would have put some downward pressure on the price.

But with regulatory authorities on both sides of the Atlantic looking like they could be flexing their muscles for a new round of penalties for past misdeeds, bank shares have been under a bit of pressure of late — Barclays is down 19% over the year so far after a pre-summer rally collapsed, with HSBC Holdings down 7%, although bailed-out companion Royal Bank of Scotland shares are up 5.5%.

Can Lloyds end the year ahead?

At first-half results time, we heard that underlying profit was up 32% with underlying costs still falling and impairment charges down 58%.

On the liquidity front things were still going in the right direction, with a fully-loaded CET1 ratio of 11.1%, up from 10.3% at the end of December and 10.7% in March. Lloyds’ total capital ratio was given as 19.7%. The flotation of 38.5% TSB had completed successfully, and since then Lloyds has successfully sold off another 11.5% to leave it holding 50%.

CEO says things look good

Chief executive António Horta-Osório told us Lloyds is in a good shape to benefit from the recovering economy and should deliver “strong and sustainable returns“, and confirmed that “we will be applying to the Prudential Regulatory Authority in the second half of 2014 to restart dividend payments, commencing at a modest level“.

All in all, I reckon Lloyds has a strong chance of ending the year ahead, especially with its shares on a forward P/E of under 10.

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Alan Oscroft 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.