The Lloyds Banking Group (LSE: LLOY) boasts its very own “100 Club”, a growing band of investors who believe its share price will soon top 100p. At today’s 77.5p, it hasn’t even got that far to go. Another 30% growth, and the share price will be there. If the fanboys are right, that makes Lloyds a funky investment right now, given that it is on a forecast yield of 3.4% for the end of this year, rising to an even jazzier 5.2% by the end of 2016. Does that sound like music to your ears? Maybe, but I suspect that the 100p target could prove harder to hit than the fan club thinks.
Mis-sold
After a dramatic burst of growth three years ago, which turned Lloyds into an unlikely three-bagger in a couple of years, the stock has stopped shaking its booty. Over the last two years, it has gone nowhere. It is down 13% in the last three months and most of the losses stemmed from before the recent market crash. Lloyds has been hit hardest by the PPI mis-selling scandal, shelling out £13.4bn in compensation so far, half the total banking industry’s bill. As the complaints roll in, it may have to hand over another £10bn. Plus there is the cost of administration, as it employs 7,000 people just to sort through claims. Claims for mis-sold packaged bank accounts are also rising.
Bad Debts And Good Banks
Those who thought the bank might be able to improve margins in a rising interest rate world may want to think again after recent stock market troubles, which could put a UK base rate hike on the back burner. Lloyds’ bad debts are at historic lows but could quickly climb if the recent market crash is the start of something nasty. All the banks are vulnerable to a deflating world.
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Its focus on the mature UK banking market may limit the risks, but also limits future growth prospects. Lloyds may also see its customer base nibbled away by the challenger banks. Last year, more than 1 million customers took advantage of the easier switching regime to swap banks, and the number set to rise this year.
1oo Up
I’m not alone in my scepticism. Charles Stanley recently noted that Lloyds’ shares are trading on a premium rating of 1.6x tangible book value, which may limit near-term upside. Deutsche Bank has exited the 100 Club, cutting its target from 100p to 97p on concerns of the impact of tighter regulations on mortgage lending, plus worries over and the potential for worsening loan losses.
The Lloyds fanbase still have plenty of good tunes to sing. First-half profits rose 38% to £1.2bn, despite PPI and the costs of selling off TSB. A strong capital ratio, successful cost-cutting measures, flat operating costs and low impairments make this possibly the lowest risk banking stock. Especially since the UK is growing faster than foreign markets. The yield could hit 7% by 2015, with the potential for special payouts on top. Lloyds investors still have plenty to celebrate but the 100-up party may delayed for longer than they would like.
