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One reason Lloyds Banking Group plc’s stock price is still so low

There’s no denying that the Lloyds (LSE: LLOY) recovery from its bailout in 2008 has been nothing short of impressive. The bank, which was on the verge of bankruptcy at the time of the bailout, has since recovered to be one of the best capitalised and most efficient banks in Europe. What’s more, after the acquisition of credit card group MBNA from its former owners at the end of last year, Lloyds is now back on a growth trajectory.

But despite Lloyds’ impressive turnaround and the bank’s newfound thirst for growth, the market continues to avoid its shares. Indeed, over the past two years, shares in Lloyds have fallen by 11% excluding dividends, a drop brought into even sharper focus at present given rival Barclays‘ recent share price surge.

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What’s holding Lloyds back? 

The one main factor that seems to be holding shares in Lloyds back is trust. Even nine years on from the onset of the financial crisis investors are still finding it difficult to trust banks. And who can blame them? The entire European banking sector is currently facing numerous headwinds, which are holding back earnings and non-performing loans are eroding capital buffers. Unfortunately, there’s no sign these pressures will dissipate anytime soon.

Lloyds isn’t entirely immune from these pressures, but over the past few years the bank has shown that it’s a much more stable and productive institution than the majority of its peers both at home and overseas — a fact City analysts have been extremely keen to point out.

At the top of its game 

A recent broker note from analysts at Barclays proclaimed Lloyds can generate a consistent, sustainable 13% return on tangible equity (a measure of banking profitability) every year for the next three years. By comparison, Deutsche Bank and Barclays reported a return on tangible equity of 2% and 3.6% respectively for the third quarter 2016.

Even Lloyds’ American peers, which are usually considered to be in better health than European banks, are lagging the UK lending behemoth. JP Morgan, Bank of America and Morgan Stanley reported a return on equity of 10%, 7.3% and 8.7% respectively for the third quarter.

On top of the sector-leading profitability ratios, analysts at Barclays also expect Lloyds to return as much as £10bn of capital to investors over the next few years to 2019. Lloyds’ management has long stated that the bank will return any excess cash to investors and the £10bn capital return will translate into an estimated 15p per share, around a quarter of the company’s current market capitalisation.

The bottom line

So overall, it appears that investors’ lack of trust in the banking sector in general is holding back Lloyds’ shares. However, for patient long-term investors, this lack of confidence is no reason not to invest. Lloyds is arguably one of the best banks in Europe, the shares trade at an attractive 9.2 times forward earnings, support a dividend yield of 3.4% and if City analysts are to be believed, shareholders are set for a 15p per share cash return over the next three years.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended 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.

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