So far this year has been a dose of reality for the banks. After rising inexorably since the Eurozone crisis, this year banks such as Lloyds (LSE: LLOY) (NYSE: LYG.US) and Barclays have been treading water or falling.
So, have the skies clouded? Have we already seen the best of the share price rises for these two banks? I don’t think so.
Reality is catching up with expectation
In particular, Lloyds’ share price has been rocketing, tripling through 2012 and 2013. Eventually the share price had to take a breather, giving reality time to catch up with expectation.
So, let’s take stock. Where does Lloyds Banking Group stand now? Well, the bank’s latest results show that the legacy of reputational damage and scandal since the Financial Crisis is still lingering.
Lloyds have allocated another £1.1bn to “legacy issues”, including the PPI mis-selling scandal, and the Libor rate-fixing settlement. The amount so far allocated to PPI mis-selling in particular is astonishing.
This has meant that pre-tax profit over the first six months of this year has actually fallen. But dig deeper and you will find that the underlying profit is £3.8bn.
The fundamentals are still strong
The fundamentals are still strong. Consensus estimates say that the 2014 P/E ratio will be 11.2, with a dividend yield of 2%, and the 2015 P/E ratio will be 9.5, with the dividend yield rising to 4.7%. With interest rates set to increase gradually either late this year or early next year, and, despite the recent moderation, a housing market that is still booming, Lloyds’ profits are expected to surge ahead in the coming years.
Eventually I expect that the real, reported profit will match the underlying profit. Eventually the last of the PPI mis-selling claims will be made, and the bad debts will be cleared. Eventually the gaping wound of reputational damage that the Financial Crisis caused will heal, and we will look at the banks just as we look at any other industrial or business sector.
That’s why I still rate Lloyds as a strong long-term buy. And the current dip in the share price may have created a buying opportunity. I, personally, am keeping Lloyds on my watch list, ready to add to my holding on any dips. But don’t expect overnight results; the banks are an investment for the patient.