Both of our bailed-out FTSE 100 banks are set for a growth in profits this year, but the outlook for Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US) into 2015 is looking rosier than Royal Bank of Scotland.
Both are expected to return to profit for the year ending December 2014, but early forecasts put that growth continuing for Lloyds but falling back for RBS — there’s 5% growth in earnings per share (EPS) forecast for Lloyds against a decline of 11% for its competitor.
Dividend worry
The only dark cloud for Lloyds at the moment is growing doubt about its ability to pay a dividend in the second half of this year. It passed, but came last among UK banks in the latest round of European bank stress testing, and it’s increasingly uncertain whether the Prudential Regulation Authority will give it the nod.
But how realistic are those growth expectations?
In its latest strategic update, issued on 28 October, Lloyds told us that “The strategy laid out in 2011 is now substantially complete. We have reshaped the Group, strengthened the balance sheet and delivered Simplification savings which have enabled reinvestment for growth“. By continuing to reduce costs, simplify its business and improve efficiency, strengthen its financial ratios, and deliver better services to customers, Lloyds aims to deliver sustainable growth in the long term — so the motivation appears to be there.
Strong third quarter
And a Q3 update released on the same day revealed a 35% increase in underlying profit to £5,974m, with a statutory pre-tax profit for the quarter of £1,614m (making up the bulk of the £1,694m for the nine months) — taking into account a further £900m set aside for PPI mis-selling provisions.
For the full-year, reported pre-tax profit is expected to be “significantly ahead” of the first half.
The big question — with the shares at 76.5p, are they good value for those growth prospects? I think they are.
One to buy?
Forecasts give us a P/E of under 10, dropping to 9.5 for the 2015 year, and that’s way below the FTSE’s long-term average of around 14. Granted there are no dividends yet, and the FTSE’s P/E of 14 will get you a yield of around 3% — but Lloyds’ dividends should be up above 3% pretty soon, hopefully in 2015.
Of the two, and with RBS on a 2015 P/E of 12 with much slower dividend recovery expected, Lloyds still looks like the one to consider.