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Profits rise at Lloyds Banking Group plc. Time to buy?

Lloyds Bank (LSE: LLOY) — the perennial favourite of retail investors — today reported “strong underlying performance” for the three months to the end of March. With the numbers improving and a PPI claim deadline recently announced, is the UK’s biggest mortgage lender now a strong buy?

“Significant Improvement”

Underlying profits at the £48bn cap came in 1% higher at £2.1bn with statutory profit before tax rising to £1.3bn. Along with a 56.5p rise in net tangible asset per share, the bank’s income growth rate also exceeded its expenses growth rate. Earnings per share rocketed by 83% when compared to the same period in 2016. 

Lloyds continues to boast a strong balance sheet with a core equity capital ratio — a measure of the bank’s financial strength — of 14.5% (the minimum permitted is 4.5%). Elsewhere, it was confirmed that the UK government’s ownership of the bank had now dipped below 2%.  

Looking ahead, Lloyds stated that it was on track to meet its various financial targets for this year while longer-term guidance remained unchanged. Net interest margin (the difference between interest coming in and going out relative to assets) was now expected to be close to 2.8% in 2017. It also expected open book mortgage balances to stabilise and then grow in 2017. Capital generation was now forecast to be at the top end of ongoing guidance.  

Commenting on results, CEO António Horta-Osório said that Lloyds had demonstrated the strength of its “customer-focused, simple and low-risk business model” as well as the company’s resilient nature given the current uncertain economic background. Low unemployment and reduced indebtedness continues to support the UK economy, while also meaning that the bank’s portfolio of assets remains “strong and stable“, he said. The setting aside of £100m to compensate victims of the HBOS Reading fraud was also confirmed. 

A solid buy?

So, a fairly positive update from the bank. Is now the time to buy?

Trading on just above nine times forward earnings, Lloyds remains a tempting investment, particularly given that net profits in 2017 are expected to be almost double those achieved last year. With no presence in investment banking, I’m inclined to think that it remains a far safer play when compared to peers such as Barclays and HSBC. Although the bank recently set aside a further £350m to cover claims relating to PPI, the passing of the aforementioned deadline should also do the share price no harm.

At 5.6%, the yield at Lloyds is over fives times more the current rate of interest offered by the best easy access cash ISA and well covered by profits. To make things even more attractive for income hunters, dividends are predicted to be hiked a further 14% in 2018. 

Buyer Beware

That said, the performance of Lloyds share price will always be highly correlated to the health of the markets in general. With so many momentous political events coming up, it’s quite possible that the UK’s most popular stocks could experience some volatility over the next few months. A surprise win for right-wing Marine Le Pen in France, for example, could seriously test investors’ resolve.

Of course, there’s also Brexit to consider. While Lloyds is already making plans to convert its branch in Berlin into its European base, any hint of negotiations being even tougher than expected could see investors run for cover.

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Paul Summers has no position in any shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.