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Why Lloyds Banking Group PLC Could Be The Banking Bargain Of 2015

Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US) has had a pretty good 2014, and that could well prove to be a springboard to an even better year in 2015.

There’s been a little disappointment over how narrowly the bank managed to squeeze through the latest Bank of England stress tests. But the tests were onerous indeed, simulating a 30% fall in the value of sterling, a 35% house price crash, a rise in unemployment to 12%, and inflation peaking at 6.6% in addition to other seriously nasty downturns.

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Price dip

Lloyds shares dipped a little after the test results, but I reckon getting through a test like that was a major milestone and deserved a better response.

At the third-quarter stage at the end of September, Lloyds reported a statutory pre-tax profit of £1.69bn for the nine months, with £1.61bn of that coming in Q3 itself, and everything else was still moving nicely in the right directions — underlying costs down, impairments down, net interest income up, return on assets up…

There’s actually a pre-tax profit of nearly £6.7bn forecast for the full year, and Lloyds reported a 35% rise in underlying profit to more than £5.9bn at Q3 time, so the halfway point in 2014 looks like it was the pivot and that Lloyds is back to sustainable profit.

Where are the dividends?

Perhaps the biggest uncertainty at the moment is over Lloyds’ hope to pay a dividend in the second half, and all we know of that right now is that it’s in “ongoing discussions” with the PRA. If it doesn’t happen this time we should probably expect a price fall, but I don’t think the precise timing of the resumption of dividends is too important myself — a resumption delayed until 2015 H1 would not affect my opinion at all.

No, it’s next year’s dividend that will count, and forecasts are already suggesting a yield of 3.8%.

Lloyds shares have had a pretty flat 2014 with a fall of 2%, after a few years of good gains, and that could give is an attractive buying opportunity right now.

With the shares at 76p, on a forward P/E of only 9.7 based on full-year forecasts and dropping to 9.3 for 2015 prognostications, my opinion is decidedly bullish. Lloyds shares are priced significantly cheaper than Barclays right now, and I rate Barclays as very strong — and we’re still in early recovery days at Lloyds.

Analysts say Buy

The City’s take is positive, too, with by far the biggest group of brokers who are offering forecasts sitting in the Strong Buy camp. That comes after earnings forecasts have been steadily upgraded over the past 12 months — from 6.8p per share a year ago, we’re looking at a predicted 7.8p now for 2014.

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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.

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