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Why Lloyds Banking Group PLC Is Set To Beat The FTSE 100

The last year has seen shares in Lloyds (LSE: LLOY) (NYSE: LYG.US) underperform the FTSE 100 by around 4%, which is clearly a disappointing result. Key reasons for this have included the sale of a further tranche of the government’s stake in the bank which has hurt investor sentiment, while the wider banking sector has struggled to gain momentum following numerous fines and concerns regarding the state of the Eurozone.

However, over the next year and beyond, Lloyds looks all set to beat the FTSE 100. Here’s why.

Improving Sentiment

Clearly, investor sentiment in Lloyds will not improve all on its own, but the passing of the General Election could cause it to shift dramatically. Certainly, the result is very uncertain at the present time, and the market seems to be including a discount so as to accommodate this. However, once the election passes, it is likely that, over the medium term, investor sentiment in Lloyds and in the wider banking sector will improve significantly.

That’s because, while the Labour party may be viewed as tougher than the Conservatives on the sector, they are unlikely to kick it too hard, or else it could slow down the rate of growth of the wider economy. As such, it is the fear of the unknown, rather than what could realistically take place over the next handful of months, that is holding back investor sentiment in Lloyds.

UK Focus

While a focus on the UK was once seen as a major negative for any bank, nowadays it is viewed as a positive. That’s because the UK economy is rebounding from the financial crisis at a rapid rate, with its GDP growth numbers being among the highest in the developed world. And, with the Bank of England expected to keep interest rates low and maintain a very loose monetary policy, the prospects for the economy are very bright.

This should help Lloyds considerably, since it acquired a significant amount of mortgages and business loans when it purchased HBOS in 2008. As such, Lloyds more so than any other bank will benefit from an improving UK economy, which means that its profitability should continue to move in the right direction.

A Lack Of Competition

Despite the government’s best efforts, there is still a distinct lack of competition in the UK banking sector. Certainly, various retailers such as Tesco are moving into current accounts but, realistically, they are unlikely to make a severe dent in the market share of incumbents such as Lloyds. That’s because there is not a culture of switching bank accounts in the UK, which means that banks must devise enticing offers in order to attract new customers.

And, with their size and scale coming into play, traditional banks can offer the most lucrative offers to new customers. For example, Halifax (which is owned by Lloyds) currently offers new customers £125 to switch current accounts to them, then pays them £5 per month for paying in their salary. Therefore, it is little wonder that Lloyds, and its main rivals, are maintaining their market share at the present time and seem likely to continue to do so over the medium to long term.

Looking Ahead

Clearly, the last year has been tough for investors in Lloyds and, with the General Election coming up, the bank’s share price could remain volatile. However, with investor sentiment likely to pick up in the medium to long run, as well as the growth potential for the UK economy and the lack of realistic competition in the sector, Lloyds’ longer term future appears to be bright. As such, it looks set to beat the FTSE 100 and is a very appealing buy at the present time.

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Peter Stephens owns shares of Lloyds Banking Group and Tesco. The Motley Fool UK owns shares of Tesco. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.