The banks used to be some of the most profitable companies in Britain. Before the Great Recession, financials like Lloyds (LSE: LLOY) and Royal Bank of Scotland earned billions of pounds, and were some of the most highly valued firms in the FTSE 100. But ever since the Credit Crunch, Lloyds Banking Group has hardly made any money. Will it ever return to the mega profits of yesteryear? Well, let’s dig a little deeper.
The banks used to be the engine of Britain’s economy
The heyday of the banks was in the 1980s and 1990s. A booming financial sector, and a wave of City deregulation called ‘the Big Bang’, created tens of thousands of jobs. All the best graduates wanted to work in retail and investment banks.
And the business environment was perfect for these financials. Interest rates had to be high to control inflation, and so current accounts were hugely profitable. A growing housing market meant that the mortgage market could flourish. And rising stock markets meant party time for the investment banks.
But, in the background, profound changes were taking place. Rapidly growing global production meant that deflation was now the threat, and jobs were migrating to emerging markets. The modern scenario is a low-cost, China-centric world where low interest rates are the norm.
People are gradually realising that deflation isn’t just a phase the world economy is going through, but is the way the world now is. And that’s bad news for banks. Current accounts are no longer profitable. What’s more, Lloyds has set aside ridiculous sums of money to pay for the PPI scandal, and also has had to steadily clear its mountain of bad debt.
Investors are warming to Lloyds again
Yet there also positives. The British economy is resurgent, with an astonishing ascent in the employment rate and high and rising house prices. Lloyds is Britain’s biggest mortgage provider, and this part of the business is set to do well. This firm also has some of Britain’s biggest brands, such as Lloyds, Halifax, Bank of Scotland and Scottish Widows.
Yet I’m afraid I don’t think Lloyds will ever reach its pre-Credit Crunch heights again. The world has just changed far too much and far too quickly. So I can’t promise a rapid increase in income, and a rapidly rising share price. There never will be a return to multi-billion pound profits.
Instead, what I foresee is a steady recovery, a return to respectable profitability, and a gradually rising dividend yield. The share price will climb, but only slowly. Lloyds will find a place in many people’s portfolios as a dependable dividend stock.
Investors are, at last, starting to warm to Lloyds once again. But you’ll have to be patient. It’s a long road back.