When I think of UK-focused financial services and banking company Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US), two factors jump out at me as the firm’s greatest strengths and top the list of what makes the company attractive as an investment proposition.
1) Staying power
Events during the last few years inform us that the authorities will not allow nationally important banks such as Lloyds Banking Group to fail completely. The British government’s bailout confirms that. Even though more than 30% of the firm’s shares are now in the hands of Her Majesty’s Treasury, it may be of some scant comfort for investors to reasonably expect similar financial-trauma treatment if Lloyds ever gets into so much trouble again.
Of course, the cost-consequence of any future government financial help is measured in terms of dilution of investors’ interests, but at least investors are unlikely to lose all of their capital. That’s more than can be said for many investments during the aftermath of the credit crunch. One firm after another took the cyclical dip too hard and failed too get up again after flat-lining at the bottom.
2) Transformation potential
The excesses of the banking industry have been laid bare for all to see in recent years. One scandal after another has rocked the sector, and the regulators have held Lloyds to account for its part in consumer deception, manipulation and mistreatment with fines for miss selling.
The image of banking as a conservative, socially responsible and respected industry, which some of us have carried from earlier decades, is well and truly blown, as banks worldwide have devised ever-racier methods of maximising the buck that they take. The banking industry thought it was in control of its actions; recent history proves that it was not.
So, having failed so spectacularly with the nuts, bolts and basics of running its business, the banking industry as a whole has turned much of its attention inwards to sort out those very business basics. Lloyds is one of the banks engaged in such business-model re-engineering and therein is the opportunity for investors now. Surely, with such hard and fundamental lessons still ringing in the firm’s metaphorical ears, right now is potentially one of the safest times to invest in the bank as it re-emerges from the turmoil, streamlined and refocused for the coming trading years.
Lloyds’ business seems more or less ‘back’ to a new normal and steady progress seems likely going forward.
What now?
The banking industry looks as if it has settled down again, which puts the shares of banks like Lloyds back on many investors’ shopping lists.
However, as the industry has such a poor track record, I wouldn’t knock investors choosing to avoid the sector completely.
