Shares in Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US) have already risen by 8% in 2014, following their 64% increase in 2013.
The theory behind the gains is simple — Lloyds is widely expected to exit its bailout and resume dividend payments in 2014.
However, Lloyds’ current valuation is beginning to suggest to me that all this talk of dividends — before any have been declared — has encouraged investors to push up Lloyds’ share price based on hope alone.
What about old-fashioned assets?
I’ve recently been taking a closer look at Lloyds’ latest results, and I’m concerned that the bank’s current valuation is ignoring the likelihood of further losses.
Let’s start with the basics: Lloyds’ third-quarter update reported a tangible net asset value per share of 51.1p, down from 54.6p at the end of June. That places Lloyds shares on a price to tangible book value (P/TB) ratio of 1.7 — higher than any other UK bank, even the safest and largest of them all, HSBC Holdings, which currently trades on a P/TB of 1.4.
One reason given for the fall was losses on non-core disposals — in other words, selling bad loans at a hefty discount, to get them off the bank’s balance sheet. Lloyds has continued disposing of non-core assets since October, selling a further £1,851m of assets for £1,207m — a 35% loss.
There’s more to come, too. At the end of June 2013, Lloyds had £91bn of non-core loans, of which £28bn were impaired. Total provisions for losses against these loans were £15bn — and while getting rid of them is ultimately going to be good news for Lloyds, it will reduce the bank’s net asset value still further.
Finally, there’s a risk that rising interest rates over the next few years could push up the impairment rate on Lloyds’ core loan portfolio, which currently stands at 2.8%.
Hold your (black) horses…
Analysts’ consensus forecasts are suggesting a payout of 2.4p per share from Lloyds in 2014. That equates to a 2.8% prospective yield, which is less than the 3.6% on offer from Barclays, despite the fact that Barclays avoided a bailout and has maintained dividend payments throughout the crisis.
For my money, Lloyds ‘ current share price indicates that it is priced to perfection. The government still needs to sell its £20bn stake in the bank, and it has not yet granted permission for Lloyds to restart dividend payments.Â