The last 10 years have been extremely eventful for Lloyds (LSE: LLOY). It acquired HBOS, became part-owned by the government, survived the credit crunch and since then has gradually improved its financial performance. The next decade may prove to be equally eventful due in part to technological change, the emergence of challenger banks and uncertainty regarding the UK’s economic outlook.
A changing landscape
The UK banking industry is likely to be a lot different in 10 years than it is today. Technological change is becoming increasingly rapid and this means that branch banking may become less popular. Banking apps and online services are likely to take over from face-to-face contact and on this front, Lloyds seems to be well placed. Its financial standing has improved dramatically following the credit crunch and it performed relatively well in the most recent stress tests. Therefore, it appears to have the financial firepower to invest in new technology in order to remain relevant for customers.
Furthermore, Lloyds has a size and scale advantage among even the larger UK banks. Its acquisition of HBOS created a banking giant and this could give Lloyds a competitive advantage over challenger banks. They have been successful in grabbing market share in the mortgage market in recent years, but Lloyds could retain its dominant position over the next decade. It could benefit from cross-selling opportunities in other financial products, while the end of the government’s part-ownership may allow it to become increasingly competitive on pricing over the coming years.
An uncertain outlook
Brexit could be a -changer for the UK economy. In the near term, it is difficult to see how leaving the EU will affect Lloyds’ financial performance. However, in 10 years’ time investors will know whether it was the right move for the economy. Lloyds could endure a difficult number of years due to Brexit, with higher inflation likely to cause demand for borrowing to come under pressure as disposable incomes are squeezed.
However, with Lloyds having become more streamlined and efficient in recent years, it appears to be well-placed to deliver relatively strong performance, even if Brexit leads to economic woes. And if leaving the EU causes an economic boom for the UK, the bank could deliver higher earnings growth than rivals thanks to its high dependence on the local economy.
Margin of safety
Clearly, the future for Lloyds is uncertain. However, it may be prudent to assume that the bank will experience a difficult period at some point during the next 10 years. History tells us that economic growth does not last forever. While a recession on the same scale as the credit crunch is unlikely, the economic outlook may deteriorate in the coming years.
As such, buying Lloyds right now could be a sound move. It trades on a price-to-earnings (P/E) ratio of just 9.8, which indicates that it has a relatively wide margin of safety. Given its financial strength, efficient structure and growth potential in the long run, it could deliver high capital gains over the next 10 years.
