Today I am looking at why I believe Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US) is set to fly.
Profits continue to rumble higher
In a precursor to its full-year financial release, Lloyds announced this week that it expects to record underlying profit of £6.2bn for 2013 — results for which are due on Thursday 13 February — representing more than double that of the previous 12-month period.
Although the firm’s transformation plan continues to pay off handsomely, news that the bank has been forced to boost provisions for various legacy issues was less welcome. The firm has increased provisions for the mis-selling of payment protection insurance (PPI) by £1.8bn during quarter four, and a further £130m for the wrongful sale of interest rate hedging products. Still, this move was widely expected by the market and brings coverage to respectable levels, particularly compared with some of its banking peers.
Turnaround plan keeps on delivering
The company’s refocused efforts towards the UK high street has enabled it to tap into the recovering domestic economy, and Lloyds announced that core loan growth registered at 3% during the entire year. This suggests that activity has ratcheted up in recent months, as growth during January-September came in at a more modest 1%.
Meanwhile Lloyds’ extensive cost-cutting and restructuring efforts has also helped to boost the firm’s net interest margin (NIM), which surged to 2.12% for the full-year from 2.06% during the first nine months of 2013. With more expenses set to be stripped from the system and the prospect of more asset sales in the offing, I expect margins to continue heading northwards — indeed, Investec expects the NIM for 2014 to register at 2.25% at least.
Dividend resumption on the cards
Lloyds was, of course, forced to halt its dividend policy in 2009 after the global credit crunch smashed profits and forced a partial bailout by the British government. But the firm’s galloping turnaround story has seen speculation over a near-term policy resumption reach fever pitch, with the firm noting just last week that it had begun talks with regulators over reintroducing the dividend.
Indeed, Lloyds announced plans to restart the dividend this year, and analysts expect the bank to churn out full-year payouts of 2.4p and 3.8p for 2014 and 2015 respectively. These projections cause the yield to leap from a respectable 2.8% this year to an eye-watering 4.6% in 2015.