The election result could prove to be a game changer for Lloyds (LSE: LLOY). Its strategy has centred upon shifting its focus away from being an international banking stock and towards a company which is focused on the UK for the bulk of its profit. This has been beneficial while the UK economy has been performing relatively well, but could lead to difficulties now that the UK faces a less certain macroeconomic outlook.
An uncertain future
The outlook for Lloyds is closely linked to the performance of the UK economy due to its current strategy. This started with the acquisition of HBOS during the credit crunch in 2009, where Lloyds bought a failing business which controlled vast swathes of the UK mortgage market in particular. Lloyds has sought to maintain that dominance and remains the UK’s largest lender for residential mortgages. This has provided it with improving returns during a period of house price growth and high activity levels in the property market. However, following the election result the company’s outlook is less certain.
At the same time as maintaining its presence in the UK, Lloyds has made major asset disposals abroad. This has generally been seen as a positive strategy which has ensured that Lloyds gives sufficient time and capital to its core operations in the UK. However, it now means that a potentially weaker pound could leave Lloyds with a lack of positive currency translation versus sector peers which have maintained their international status. This could mean that it lacks the same level of reported profit growth potential as some of its industry rivals.
Despite the scope for risks in the outlook for the bank, Lloyds has the potential to pivot regarding its strategy. The recent acquisition of MBNA’s credit card business shows the bank has the financial strength to make major purchases without impacting negatively upon its balance sheet. In fact, having improved its cost:income ratio and de-risked its balance sheet, it could be argued that it is in a stronger position than many of its rivals to take advantage of low valuations across the sector.
As well as M&A potential, Lloyds remains a cheap stock. It has a price-to-earnings (P/E) ratio of only 10, which is relatively low when compared to its banking sector peers. Certainly, this reflects the increased risk which it has versus industry rivals when it comes to geographic diversity. However, with its shares forecast to yield 5.7% this year from a dividend which is covered 1.8 times by profit, it could prove to be a relatively sound income stock for the long term.
Following the return of Lloyds to the private sector, its shares have failed to receive a bounce of any kind. In recent days they have responded negatively to political risk, while the UK’s uncertain economic outlook could mean they remain volatile in future months. Despite this, a low valuation and the scope to change strategy through M&A activity mean that it could be a shrewd investment. As such, it could help Foolish investors on their journey to millionaire status.
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Peter Stephens owns shares of Lloyds Banking Group. 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.