Shareholders (and management) in Lloyds Banking Group (LSE: LLOY) could be forgiven for banging their heads against the wall. The bank – which had to set aside billions for payment protection insurance (PPI) claims, past misdemeanours and for a long time was having its shares sold off by the government – now seems to be rapidly improving.
It has recommenced dividend payments and the balance sheet is getting stronger year-on-year, yet the share price is falling and has gone nowhere under Portuguese chief executive António Horta-Osório who joined the bank back in 2011.
He’s done a good job simplifying and improving the bank since the recession 10 years ago. Navigating the tricky waters of banking in the last decade is no simple achievement. Yet despite this, the share price has stagnated and in recent times has fallen once more. In the last six months it has fallen nearly 10%. Does that mean now is a good time to buy the shares?
Coming off the naughty step
Firstly, it’s no secret that banks in the UK – and further afield – have been battered by a whole range of fines for what many see as reckless behaviour conducted during the boom years pre-recession.
Lloyds has been penalised for the PPI mis-selling, and further provisions being set aside for compensation have been a regular feature of its trading updates for quite a while, but there is light at the end of the tunnel. A deadline in August 2019 has been set for all claims relating to PPI. This should draw a line under the issue and provide relief for investors in Lloyds.
Along with government ownership of much of the bank and these penalties, it was little wonder that Lloyds shares struggled for many years. Whilst other stock-exchange-listed companies have flourished in the last five years, Lloyds has seen its share price fall by 22%. Now, though, with many of its past troubles behind it and the bank cutting costs and branches, can investors find something to like?
Banking on a better future?
In its latest results, Lloyds’ first-half profit jumped 23% as costs related to PPI and other compensation halved. Lloyds also pushed up its dividend meaning it now yields over 5%, making it very attractive to those seeking income from their investments. With a price-to-earnings ratio comfortably below 15 – under 15 is often seen as good value – then the shares are not trading expensively either, giving those buying the shares protection against any future bad news.
The main barrier to growth at the current time are concerns over Lloyds’ exposure to the UK mortgage market. Once Brexit negotiations provide more clarity on this issue, Lloyds is likely to benefit majorly, much more so than the other major UK banks.
With a fast-growing dividend, no government ownership of the shares, the acquisition of MBNA and a market-leading cost-to-income ratio, Lloyds look in better shape now than it has done at any time in the past decade. That could well mean the shares will outperform the benchmark in the coming years and other banks such as Royal Bank of Scotland and Barclays.
