Will 2017 be the year Lloyds Banking Group plc falls back to earth?

Shares in Lloyds (LSE: LLOY) have been on a tremendous run over the past six months, extending what is now an eight-year long recovery from the depths of the financial crisis. From the November 2011 lows, shares in the bank are up 176% excluding dividends.

After the Brexit vote, when shares in UK banks tumbled due to concerns about falling interest rates and possible risks to the UK financial sector following the UK’s divorce from the EU, Lloyds’ shares fell. But they have since rallied by a third from the lows.

The bank’s full-year 2016 results, published last week show just how far Lloyds has come since the crisis. Pre-tax profit hit £4.2bn, up from £1.6bn a year earlier. Stripping out the impact of payment protection insurance costs and other one-off items, underlying profit for the period came in at £7.9bn, down from £8.1bn in 2015. The group benefitted from an increase in its net interest margin for the year of 2.71%, up from 2.63% the year before. With profits surging, management has decided to pay a special 0.5p per share dividend to investors, on top of its existing payout of 2.55p for 2016.

There’s no doubt that Lloyds’ 2016 figures are impressive. But the big question is, will 2016 mark a high point for the bank?

Is Lloyds past its prime? 

Even though Lloyds has chalked up some impressive growth during the past five years, the fact that underlying profit fell last year and the bank decided to acquire credit card provider MBNA hints that management is preparing for a period of slower growth.

As the UK’s largest mortgage provider, its fortunes are tied to those of the UK housing market. Although the market remains robust, there are some signs that house price growth is slowing and it is taking longer for sellers to offload homes. Any slowdown in the housing market will impact Lloyds’ bottom line. And if the signs of a housing market peak begin to appear on its balance sheet, investors could panic as they remember the problems the lender had 10 years ago.

Investor jitters 

It already looks as if investors are worried about going all-in on the bank. Shares in the group trade at an estimated forward P/E of 9.7 and yield around 4.4% including the special payout. For the 2017 dividend year, City analysts expect the firm to yield 5.2%. If the market really believed in Lloyds’ outlook, it is likely the shares would trade at a higher multiple and lower dividend yield.

There’s no doubt that Lloyds proved its doubters wrong during 2016, but the bank’s future is uncertain. It seems the market believes it will struggle to repeat its 2016 performance in 2017. Only time will tell if this will be the case. Still, management’s decision to acquire MBNA should help boost overall growth if organic growth starts to fail. And even if growth stalls, it is likely the bank will maintain its dividend payout at current levels, and further special dividends may even be on the cards. 

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Rupert Hargreaves 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.