It’s About Time The Market Woke Up To The Potential At Lloyds Banking Group PLC

If you are investing with a long-term view — something we avidly encourage on the Fool — the short-termism of the wider stock market can take you by surprise.

I was certainly taken aback by just how negatively markets responded to last week’s third quarter results from Lloyds Banking Group (LSE: LLOY). Investors didn’t like what they saw, yet it did little to dent my view that this is one of the most attractive stocks on the FTSE 100 right now.

Foolish investors should be primed and loaded to take advantage of opportunities like these, when the market has come down too hard on a stock with untapped potential. That’s if you agree with me, of course.

LLOY’s Own Story

Lloyds delivered underlying profits of £6.35bn in the first nine months of 2015, up 6% year-on-year. Markets were disappointed that this was mostly down to cutting costs than boosting income, which was disappointingly flat over the period at £13.20bn. They also didn’t like the fact that Lloyds was forced to make another £500m of provision for PPI mis-selling. This is the scandal that doesn’t die, and Lloyds has been thumped harder than any other bank.

It wasn’t all gravy but there was still plenty of sauce in there. The common equity tier 1 ratio is now a chunky 13.7%, up from 12.8% on 31 December 2014. Total capital ratio is 22.2%. This puts Lloyds in a strong position to dish up more of its future profits to shareholders. Lloyds is now generating a return on required capital of over 15%, which should support its generosity.

Retail Snail

Fretting over PPI when there is so much to feel content about seem short-termist to me. The Financial Conduct Authority will eventually put a time limit on claims, which may speed up activity in the short run, but liberate Lloyds thereafter. Investors should also cheer the low level of bad debts. These may be artificially suppressed by today’s rock bottom interest rates, but given the glacial speed at which rates are likely to increase, few are expecting a surge in bad debts from here.

As a “simple, low risk, customer-focused, UK retail and commercial bank” operating in a mature market, this is no whizzy growth stock, that’s for sure. The rise of the challenger banks will clip its wings. With Lloyds trading at below 75p, it could take some time before it joins the 100p club, but it eventually will.

Why Wait?

The big attraction lies in its income prospects. Lloyds may be yielding just 1% today but that is forecast to hit 5% by the end of next year. The bank’s capital strength suggests there is scope for further shareholder rewards in the shape of buybacks.

The market may be shunning Lloyds today but that is the best news of all — today you can buy it at just 9.19 times earnings. Some may wish to wait until next Spring’s discounted retail investor flotation. The danger is the markets may have woken up to Lloyds’ potential by then.

There are plenty more top UK stocks on the FTSE 100 if you know where to look.

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Harvey Jones 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.