Lloyds Banking Group - Is Black Beauty on the comeback?

Lloyds Banking Group: So the banks are slowly hauling themselves out of the mire post the banking crisis. Lloyds did its bit to help at the time, by trying to over pay by unimaginable factors for HBoS, only to then end up merely over-paying massively for it. Their thanks for buying a wrecked bank, which brought Lloyds to its knees, was to be told by the EU that they had received ‘state aid’ and to see Her Majesty’s Government end up as a major shareholder. The eventual verdict from Brussels was that they would have to sell off a sizeable chunk of their branch network. Hence, the carve out of TSB and sale this summer of the first equity chunks, through an IPO and placing, with the sales due to be completed by 31^st December 2015. For income investors the abandonment of the dividend was a blow as the banks sector used to be a core income generator for them. So for several years Lloyds could be ignored by income investors, but we are coming to the end of that phase.

Monday saw the results of the EBA stress test under which Lloyds would have a 6.2% core tier 1, not far above the 5.5% hurdle and tighter than Barclays (7.1%), HSBC (9.3%) or RBS (6.7%). This came soon after last week’s trailed news of a 10% workforce shrinkage over the next three years. Today’s results confirm those 9000 job losses and a 150 branch closure programme, which will hog the media headlines. This is part of a three year programme targeting an ambitious 45% cost income ratio (at 49.7% now) and £1bn of cost savings. These results overall beat most expectations with a margin improvement of 4bps to 2.51% and bad debts and impairments continuing to tail off. That is not to say though that it is business as usual, because the lending market is still very turgid and distorted by QE. The Tangible Net Asset Value is 51.8p, up from 49.4p last quarter.

On the dividend front they just say that talks with the PRA continue. The assumption is that a token 1p dividend can be expected at the 2014 Finals in February, but the narrow EBA stress test pass and leverage uncertainty put an element of doubt on this. However, an optimist can look to maybe 8p of eps in 2015, with say a 4p payout. At 74p this would be a tempting PE of 9.3x and a yield of 5.4%, but a full looking price to current TNAV of 1.4x. Overall it feels like this is a stock to start squirreling away (HMG will be sellers again), whilst leaving scope to average down or run for the exit if it strays off the recovery path.  (Neil Cumming, 28th October)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about.

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