The plan for recovery at Lloyds Banking Group (LSE: LLOY)(NYSE: LYG.US) was always going to involve a split, and next week we’ll have the first year-end results from the two parties — starting with TSB Banking Group (LSE: TSB) on Wednesday, 25 February.
Since TSB listed on the FTSE in June 2014 with a free float of 38.5% of its equity, its share price has lost 8% to today’s 260p — over the same period Lloyds shares have picked up less than 0.5% to 78p, although since the depths of 2011 Lloyds is up 230%.
Shortly after flotation, TSB reported an underlying £78.6m pre-tax profit for the six months to 30 June, with chief executive Paul Pester describing the period as “a strong six months for TSB Banking Group” and saying that customers had reacted well to “TSB’s ‘local banking’ model“.
Long haul
The third quarter brought in an underlying pre-tax profit of £41.6m, up 31.6% on the equivalent business a year previously, and TSB reported a fully-loaded CET1 Capital ratio of 18.8%, which is very strong. Mr Pester reminded us that the company is “on a five year journey to grow TSB and its returns“, so it’s hard to put any accurate valuation on TSB shares right now.
Meanwhile, back at Lloyds, we’re awaiting full-year results on Friday, 27 February.
We’ve had a pretty good recovery since those bailout days, with Lloyd recording a small pre-tax profit in 2013. We should be back to more serious profits for 2014, and most analysts are expecting Lloyds to pay its first dividend since the crisis.
Dividend back?
The dividend is only expected to come in at around 1p per share for a yield of 1.3%, and it will require final approval from the Prudential Regulatory Authority (PRA) — Lloyds has already presented its results to the PRA, but is unlikely to know if it has permission for its modest cash-return proposal until the couple of days before the results are published.
The dividend should ramp up pretty quickly, with the City already predicting a yield of 3.8% for the current year followed by 5.5% for 2016. That puts Lloyds shares on forward P/E ratings of under 10 — as low as 9.2 for 2016, in fact.
Better value?
The combination of faster recovery, imminent dividends and low P/E multiples makes Lloyds still my favourite of the bailed-out banks — it looks better value to me than its ex-TSB arm, and better than Royal Bank of Scotland which is about a year behind Lloyds’ recovery schedule.
Lloyds shares are actually down 6.6% over the past 12 months, and I can’t help thinking we’re looking at a buying opportunity now — the shares could start to firm up once we’re sure about that dividend.