Times are uncertain for Lloyds (LSE: LLOY) (NYSE: LYG.US) at the moment. If for nothing else, the fact that it is being forced to create rivals for itself, through the divestment of TSB, casts a bit of cloud over the future of this lender. Because, let?s face it, it means Lloyds will be losing its market share in the process. The company says that it owns just 50% of TSB, as of the end of the third quarter.
This brings the question: is it a good time to buy Lloyds, even after spinning off to create a rival for itself?…
Times are uncertain for Lloyds (LSE: LLOY) (NYSE: LYG.US) at the moment. If for nothing else, the fact that it is being forced to create rivals for itself, through the divestment of TSB, casts a bit of cloud over the future of this lender. Because, let’s face it, it means Lloyds will be losing its market share in the process. The company says that it owns just 50% of TSB, as of the end of the third quarter.
This brings the question: is it a good time to buy Lloyds, even after spinning off to create a rival for itself? A close look into what’s happening in the company suggests that ‘yes’ is the answer. Here are two things to consider.
Effective execution of strategies
The Financial Stability Board, or FSB, recently announced its plan to push through a regulation that requires global systemically important banks, or G-SIBs, to hold enough capital in order to increase their loss-absorbing capacity.
According to Bank of England Governor Mark Carney, the new regulation could require G-SIBs to have a loss-absorbing capacity that is up to a quarter of their risk-weighted assets. This might end up affecting dividends of UK banks like Barclays, Standard Chartered, HSBC and Royal Bank of Scotland.
Fortunately, Lloyds’ investors don’t have to worry about this, as the company is no longer considered systematically important to global finance. And that’s exactly what Lloyds has been trying to do. The company is currently working on a Group Strategic Review that includes the reduction of the company’s international presence to focus on UK, Channel Islands and the UK Expat marketplace.
Therefore, that the company is no longer on that list shows that an effective strategy execution regime is in place at the company. To support that point, the company said in its third-quarter report that it has reduced its international presence to seven countries.
This generally indicates that management at the company is effective, a feature that helps companies stay profitable over the long term.
This surely ranks among the most underrated aspect of Lloyds. A look at the annual reports of recent years shows that the company is effective at managing costs. For instance in 2009, when the impact of financial crisis was still huge, the company was able to cut cost by 8%. By way of comparison, Barclays and RBS saw their costs rise by about 24% and 32% respectively that same year.
Moreover, that it’s reducing its international presence is only going to make it more cost efficient, which, in the end, should lead to increasing net interest margin.
In addition, with the company planning to resume dividend payments, its cost-efficient model will enable it to raise dividends easily to reward investors adequately. Therefore, there could be significant gains for investors over the long-term. Investors could even start reaping from the company’s cost effectiveness when it pays 65 percent of its profit as dividends in 2016.
But wait a minute
While it is good that the company has been effective at reducing its international presence, you need to bear in mind that this increases the risk of investing in the company. It means it is becoming less diversified and as such, its competition against TSB and other UK-centric banks will even be greater.
Therefore, while the effectiveness of Lloyds is positive for the future, you want to be sure that the company is well positioned to cope with the increased competition that the divesture brings by considering other factors.
That is why the Motley Fool team has put together a free report, titled The Fool's Guide To Investing In Banks, that guides you on what to look for when investing in UK banks.
The free report discusses six essential valuation metrics that provide a good basis for evaluating UK banks. It would be beneficial to use the discussed metrics in addition to the two positives discussed above.
You can be sure that the report is completely free with no further obligation. You can get it by clicking here
Craig Adeyanju 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.