Improvements in the UK property market are good news for UK-focused banks such as Lloyds (LSE: LLOY) (NYSE: LYG.US).
In short, they mean more mortgages (and more fees) as well as fewer borrowers being in negative equity.
So, news that housebuilders are buying land at the fastest pace since the pre-credit crunch days has made me even more bullish on Lloyds.
Indeed, the government’s Help to Buy scheme and the anticipated housing boom have created a flurry of activity, with Bovis increasing its land bank by 14% and Barratt by 6% in the first half of 2013 alone.
Therefore, with the housing market seemingly on the verge of substantial gains, I’m optimistic about the prospects for Lloyds and am thinking of buying more shares for the following three reasons.
Firstly, sentiment has been strong over the last year. Indeed, it has improved significantly since the government announced plans to offload its stake, with the first 6% being lined up for sale recently. It would be of little surprise, then, if sentiment continued to strengthen as the 40% government stake is gradually sold off.
Secondly, I’m impressed by the strategy employed by Lloyds. It is successfully disposing of assets but what makes me most satisfied is that Lloyds gained an element of first-mover advantage, since it was relatively quick to identify that it needed to refocus capital on more profitable and less risky endeavours and regions. As a result, its shares have performed relatively well versus its peers due to the bank being ahead of the curve.
Thirdly, Lloyds is now shifting from a strategy of ‘contraction’ to one of ‘expansion’ as it plans for life after nationalisation. Certainly, it is not yet in the position to vastly expand but it is starting to think about how it can develop its business within the offerings that require relatively little capital and which deliver high returns with low risk.
In other words, it is beginning to expand within its chosen regions and product offerings, which should be to the benefit of shareholders in the medium to long term.
So, I’m bullish about Lloyds because I’m a fan of the bank’s strategy (in terms of it gaining first-mover advantage), its transition from contraction to expansion and also the willingness of the market to rerate shares upwards since reprivatisation became clear. The high potential of the UK housing market also makes me think about adding to my shareholding, too.