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Why Lloyds Banking Group PLC Is Up 120% Since Last Year

This time last year, in September 2012, Lloyds (LSE: LLOY) (NYSE: LYG.US) shares traded for as little as 33p.

Compared to a recent share price of 72p, that seems rather low now. Lloyds’ shares have gone up a whopping 120% since.

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Interestingly, though, this time last year, an article very similar to this one was published — reporting Lloyds’ dramatic 55% climb up to September 2012. If nothing else, it shows the stock market is always happy to provide investors with disbelief, even after it’s already caused us to raise an eyebrow a year earlier.

But, in a nutshell, can we summarise why Lloyds has enjoyed such a strong re-rating in the stock market? Or is this another one of Mr Market’s famous mood swings?

Well, firstly, Lloyds has been getting its house in order. Just a fortnight ago for example, Lloyds confirmed the disposal of another £504m worth of assets, by selling its German insurance operation and part of its loan book. The overall result has been a bolstering of Lloyds’ tier 1 capital — a primary measure of a bank’s financial strength — to 13.7%.

But it’s also made Lloyds a simpler, UK-focused lender, which investors may have found appealing. It’s arguable that measures have been taken by management to make Lloyds more intrinsically valuable over the long term.

Secondly, the UK economy — and its housing market — continues to improve. UK Manufacturing PMI, a leading indicator of business activity, recorded a multi-year high this month. And according to the Bank of England, UK mortgage approvals hit 61,000 last month, the highest level since the housing crisis began.

As the biggest lender in the UK, Lloyds naturally benefits from a more buoyant UK economy. And with Lloyds promising shareholders a juicy 70% cut of profits in the form of dividends each year, it’s possible that investors have re-rated Lloyds for its untapped income potential.

Other arguments could be made that, as it’s looked more and more like the Treasury is about to offload its huge stake in Lloyds, shareholders are anticipating the benefits of Lloyds operating as a truly private enterprise once more. And finally, as I’m sure many Lloyds’ shareholders would argue if they bought the shares last year, Lloyds’ shares were “just plain cheap”. They might go as far as to say that the shares should never have been as low as 33p to begin with!

No matter how we look at it, it seems likely that Lloyds’ rerating has been — at least partly — due to the factors outlined above, rather than random acts of the market. Of course, what will happen over the next twelve months at Lloyds, is somewhat harder to predict.

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> Mark does not own any share mentioned in this article.

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