The speed of recovery at Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US) has impressed me — from the scale of its losses and the need for a taxpayer bailout, to turning in a pre-tax profit last year (albeit a modest one) and being on course to resume paying dividends this year is more than I’d expected.
In fact, in its return to respectability, Lloyds has way outstripped fellow struggler Royal Bank of Scotland. RBS still managed to record a massive £8.2bn loss in 2013, and though there’s a return to profit forecast for this year, nobody is expecting any dividends before the second half of 2015 at the earliest.
Big profits
For the full year to December 2014, analysts are forecasting a pre-tax profit of £5.9bn for Lloyds, rising to £7.4bn in 2015, so the Black Horse bank really is back to raking in the cash. But how accurate are those forecasts?
First-half results due to be released on Thursday 31 July should give us some idea, although we did get some upbeat news from May’s first-quarter statement.
For the three months to March, Lloyds reported a rise of 22% in underlying profit to £1,800m with a statutory pre-tax profit of £1,369m. A 10% rise in net interest income coupled with a 5% reduction in costs and lowered impairment charges made contributions to the overall improvement.
Capital strength
Crucially, Lloyds’ capital position continued to strengthen, and the bank was able to report a fully-loaded Common Equity Tier 1 ratio of 10.7% — up from 10.3% at December 2013. Lloyds’ loan to deposit ratio also continued to strengthen, to 111%, down from 113% at December 2013 and from 119% a year previously.
That’s great anyway, but the real value is that capital strength will be a key consideration for the Prudential Regulation Authority when Lloyds applies for permission to resume dividends — and the bank confirmed that it still intends to apply in the second half of the year.
Considering how well things are going, I don’t think Lloyds share price has caught up with the good news yet. At 74p, the price is up around 7% over the past 12 months, which is enough to beat the FTSE 100. But it suggests a year-end P/E of only 10 based on forecasts, dropping to 9.2 by December 2015. Considering that dividends are expected to be yielding around 4.4% by then, I reckon Lloyds shares are looking good value right now.
Eyes peeled
Whether you agree or not is obviously your choice, but I’ll be looking closely at those H1 figures.