Why You Should — And Shouldn’t — Buy Lloyds Banking Group PLC

Today I am running the rule over British banking giant Lloyds (LSE: LLOY).

PPI claims keep on climbing

The high-street leviathan shocked the market with its latest set of financials last month, as the extent of previous misconduct on the balance sheet was once again laid bare. Lloyds advised that it had stashed away a further £1.4bn during January-June for claims and administrative costs related to the mis-selling of PPI, taking the total amount to an eye-watering £13.4bn.

And the bank struck a cautious tone over what future provisions could clock in at — Lloyds advised that “a number of risks and uncertainties remain, in particular in respect of complaint volumes” driven by claims management companies. Although the business advised that a further £3bn of charges could be accrued through to the close of 2016, many City experts believe this projection could turn out to be acutely short of the actual figure.

Simplification strategy rolling along

However, Lloyds’ dedication to stripping costs out of the rest of the machine is helping to support the balance sheet against these pressures. Although the bank saw operating costs remain flat year-on-year during the first half, at around £4.5bn, the bank’s Simplification strategy promises to deliver tangible gains further out as branch closures and staff reductions kick in.

Lloyds has thrown colossal sums at the programme in order to slim down its operations and boost automation, helping to deliver £225m of run-rate savings during January-June and which the bank remains confident of raising to a colossal £1bn by the close of 2017.

Lack of earnings growth

Still, these measures are not likely to turbocharge earnings any time soon as a steady series of disposals and a refocus on its retail operations leaves it trailing in the wake of its rivals in the growth stakes. While a resplendent British economic revival should keep customers marching through the doors, Lloyds is still expected to experience bottom-line stagnation in the medium term — an anticipated 4% rise this year is predicted to be followed by a 5% dip in 2016, the City says.

By comparison, HSBC and Santander’s emerging market operations are expected to drive earnings 18% and 8% higher respectively in 2015 alone as rising income levels in new markets boost revenues. And even fellow High Street-geared Barclays is expected to record a 34% bounce in 2015, while its hefty African presence promises rich rewards further down the line.

Dividends expected to explode

But even though Lloyds is expected to lag many of its peers from a pure earnings perspective, the London firm’s broadly-stable earnings outlook should underpin excellent dividend growth. On top of this, investors can also take heart from the financial giant’s steadily-improving capital pile — Lloyds’ common equity tier 1 ratio rose to 13.3% as of June, up from 12.8% as of the close of 2014.

Consequently the City expects the bank to shell out a dividend of 2.7p per share this year, yielding a very handy yield of 3.2%. And this reading jumps to 4.9% for 2016 amid expectations of a 4p reward. For investors seeking strong income prospects Lloyds is one of the banking sector’s most attractive plays, in my opinion.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK has recommended shares in HSBC and Barclays. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.