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How Lloyds Banking Group PLC Can Reach 100p

Now Lloyds’ (LSE: LLOY) (NYSE: LYG.US) recovery is nearing completion, the bank is searching for growth. Over the next three years Lloyds is targeting an additional £30bn of loans to customers with the aim of increasing its stock of mortgage lending by £20bn.

With the UK economy roaring back to life and the housing market taking off, the bank should be able to achieve these aggressive lending criteria, dragging earnings and the company’s share price higher to the key 100p mark. 

Cost cutting 

Unfortunately, even as Lloyds looks to expand its balance sheet, it could be hard for the bank’s earnings to grow, as red tape and costs are bound to increase alongside a higher volume of lending. Still, to combat rising costs Lloyds’ shifting its business model online and slashing costs in the process. The bank intends to cut around 10% of its workforce — 9,000 jobs and 200 branches by 2017 — in an attempt to save £1bn per annum. Services previously offered by these branches will be available online at a fraction of the cost to the bank. 

There’s no reason to suggest that Lloyds won’t be able to execute on this strategy. For example, the bank already has a cost-income ratio of just over 50%, the lower than almost all of its larger UK banking peers. 

Overall, it’s estimated that as a result of cost cutting, Lloyds’ return on equity — a key measure of profitability — will jump to 13.5% to 15% by the end of 2017. A high return on equity not seen since before the financial crisis, although this time the bank is taking less risk to achieve the return. 

Current City forecasts predict that Lloyds’ earnings will growth 6% during 2015 to 8.1p. If earnings continue to grow at a similar mid-single-digit rate, the bank will report earnings per share of around 10p by 2018. An undemanding P/E of 10 would then justify a 100p share price. 

Dividend 

But while it’s true that Lloyds is set for growth, the same cannot be said for the bank’s dividend. Indeed, while Lloyds’ management has promised to reinstate the bank’s dividend payout this year, so far there has been little progress on the matter.

What’s more, the results of the ECB stress tests, published at the end of last month, showed that Lloyds’ balance sheet still needs some work before it can be considered to be healthy again.

With this being the case, it could be some time before Lloyds’ payout is reinstated once again. Still, over the next few years, dividend or not, the bank is set for rapid growth and this should drag the share price up to 100p

However, if you’re looking for dividends then it might be sensible to look elsewhere.

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Rupert Hargreaves 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.