With the General Election now less than four months away, Lloyds (LSE: LLOY) (NYSE: LYG.US) could find itself something of a political ‘hot potato’. After all, it still remains part-nationalised, although the government has already sold off two major tranches of shares and there are reports that it has been offloading shares in Lloyds since the beginning of this year.
Furthermore, with the UK economy growing at a relatively fast pace, the incumbent government could use the success of Lloyds in recent years to try and convince the electorate that they should remain in power. As such, Lloyds could be in the headlines for all the right reasons over the next few months.
An Improving Outlook
Indeed, Lloyds has made excellent progress in recent years. For example, it is expected to announce its first year of profitability since the start of the credit crunch and, while the improving UK economy has been a major reason for this, credit must also go to Lloyds and its strategy.
For example, Lloyds has successfully rationalised its business and made itself slimmer, more efficient, and more financially sound as a result. It has reduced its exposure to regions and operations that require more capital and that pose greater risk in favour of lower capital, lower risk and higher return areas. The effect of this is expected to be a cost:income ratio of just 45% by 2017, which would be a stunningly low figure and compare extremely favourably to the majority of its sector peers.
Such changes are clearly making Lloyds a highly profitable bank once more and, although its bottom line growth forecasts are only in-line with the wider market over the next couple of years (at around 5% per annum), Lloyds still has huge investment potential.
Valuation
Part of the reason for this is simply Lloyds’ current valuation appears to be too low. Certainly, the government selling its stake may be having a dampening effect on the bank’s share price, but even after strengthening its balance sheet and returning to profitability, it still has a price to book (P/B) ratio of just 1.3. This has significant scope to increase during the course of the year and, as such, share price gains could be on offer for investors in Lloyds.
Looking Ahead
Lloyds remains a relatively cyclical stock in terms of its beta being above 1. In fact, it is 1.15 and this means that for every 1% move in the wider index, Lloyds’ share price should (in theory) move by 1.15%. As such, and while the General Election could cause investors to remain cautious in the short term, the FTSE 100’s favourable long term prospects should mean that investors in Lloyds benefit to a greater extent than the performance of the wider index — especially since the bank’s valuation is so appealing.
As a result, now could be a great time to buy Lloyds, with it now likely to enjoy a relatively high level of investor attention as we move through the year.