These are uncertain times for Lloyds (LSE: LLOY) (NYSE: LYG.US). Indeed, the recently announced competition inquiry could conclude that the UK banking sector needs to be broken up to enable more competition and, as a result, Lloyds could see its market share pegged back over the medium term.
Furthermore, with continued provisions for things such as PPI claims and currency probes, sentiment in the wider banking sector remains relatively weak. Despite this, Lloyds could prove to be a winning investment as a result of its considerable future potential.
Cost Savings
As part of a digital strategy, Lloyds recently announced the closure of 200 branches and the loss of 9,000 jobs. The key reason for this is simply customer demand. In other words, customers are not using branches to the same extent as they were a number of years ago, and instead prefer to bank online and via the telephone.
Furthermore, Lloyds is embracing technology to allow it to process a number of administrative activities, such as mortgage applications, more quickly. This will not only reduce costs over the long run, but will produce a more efficient and faster service for customers, which will clearly be beneficial for the bank’s bottom line. In terms of numbers, a mortgage application should take no more than one week (versus five weeks at present) and cost savings of £1 billion per annum are expected from 2017 onwards as a result of the strategy.
Profitability
These cost savings will aid Lloyds’ bottom line in future and, perhaps more importantly, the bank is due to return to the black this year. This is a significant moment for Lloyds, as it will be the first time since the start of the credit crunch that it reports a net profit. This should allow it to recommence dividend payments and, as well as ambitious cost savings, Lloyds also has ambitious plans for its dividend.
For example, next year it is forecast to pay out 2.9p per share as a dividend. At the current share price this equates to a yield of 3.8%. While relatively attractive (the FTSE 100 yields 3.4%), Lloyds is aiming to pay out around 65% of its profit as a dividend in 2016. This, it argues, is very achievable due to it having a strong capitalisation ratio and upbeat prospects for the medium to long term.
Were it to pay out 65% of profit in 2016, it could mean that Lloyds yields as much as 7% at its current share price. And, that figure assumes no growth in profitability between 2015 and 2016, which is a conservative assumption.
Looking Ahead
So, while the present time is uncertain for banks such as Lloyds, its move back into profitability and stunning income prospects could help it to become a great investment over the medium term.
