What next for Lloyds shares?

 

Lloyds Banking Group announced its first annual profit since being bailed out by British taxpayers – but what is next for the shares?

Lloyds TSB branch

Lloyds shares: What stance should you be taking?

The 41% state-owned bank had a £2.2bn pre-tax profit last year. This represents a superb turnaround from its £6.3bn loss in 2009.

And the bad debt figure narrowed to £13bn in 2010 from £23bn the year before.

This is Money took a look at whether investors should be flocking back to Lloyds in August, after announcing a six month profit.

At the time investors and experts alike were divided.

It seems rightly so. The shares have dropped off since that August date, from trading around the 74p mark, to a current price of 63p.

There still remains a lingering doubt over the long term prospects for the bank and shares in the banking industry in general.

And the bank is banned from paying out dividends until 2012 as part of the conditions of receiving state aid at the peak of the financial crisis.

However, there has been some talk from experts that when the dividend does come, it could be hefty.

John Smith, senior fund manager at Brown Shipley, says: 'Their results were good, but there are still problems on the fringe, such as their bad debts.

'There is still uncertainty going forward and banks are not the safe investment that they were perceived to be a few years ago.'

Is he right? This is Money rounds up the expert's views on the potential for the shares at Lloyds Banking Group.

Cautious but stance is under pressure

Richard Hunter, head of UK equities at Hargreaves Lansdown

Lloyds has made steady but unexciting progress in its announcement today, as trailed in its third quarter November update.

Despite pain being incurred in Ireland, as was the case with RBS, and some additional difficulties in Australia, loan impairments showed a significant improvement over the previous year.

Cost containment remains on track, with synergies arising from the HBOS acquisition beginning to wash through.

The group claims to be taking a more prudent approach to lending, which in the UK could prove beneficial as the country moves towards an age of austerity.

However, one of the investment headwinds facing the company is the lack of material geographical diversification as enjoyed by some of its rivals, such that Lloyds is seen as something of a play on the UK economy.

The technical overhang of the government stake and the lack of a return to the payment of a dividend place further restrictions on the stock.

The initial reaction to the numbers has been one of disappointment, adding to the shares' recent underperformance as compared to the wider FTSE100 – down 2% versus a gain of 16% over the last six months.

The current consensus of the group as a cautious buy may come under some pressure following this update.

Lloyds remain very attractive on a medium-term view

Jonathan Jackson, head of equities, Killik & Co

Although at a headline level, these results were above expectations, it is the mix of the earnings and the outlook that has caused some disappointment.

Management appear to be putting early restructuring of the balance sheet ahead of short-term profitability.

The rationale is that the de-risking of the balance sheet in terms of loan-to-deposit ratio, liquidity position, term funding profile and capital ratio will help to reduce the cost of funding and hence allow recovery of net interest margin in the medium term.

Although there may be some downgrades following these results, we believe that this strategy will allow earlier normalisation of the business and make a placement of the government stake to a strategic investor more likely.

At 1.1 times tangible Net Asset Value, and 6-7 times normalised earnings per share, Lloyds still remains very attractive on a medium-term view and any share price weakness should be used as a buying opportunity.

Increased profits will be met with increased enthusiasm

Paul Mumford, senior fund manager, Cavendish Asset Management

It's a welcome relief to see Lloyds back in the black. Though the figures don't quite show the boisterous recovery some were hoping for, the bank looks in good shape. But its success could come at a price.

The stand-out performance in the retail division will undoubtedly raise eyebrows, adding fuel to the fire of those that view the banking behemoth as an anti-competitive force.

There is a real dilemma here for the investor: the better Lloyds does, the more the question of competition – not to mention the taxpayer stake – will loom.

Increased profits will be met by increased enthusiasm for radical regulatory intervention.

While Eric Daniels can lock his office for the last time feeling that he's put the bank back on the road to recovery, his successor still has a lot to do and full rehabilitation might take longer than expected.

No plans to buy into Lloyds

Jane Coffey, fund manager at Royal London Asset Management

In August, Jane Coffey said: 'Investors need to decide whether there is further upside to come from Lloyds, and I'm not sure there is.'

This month she is still indifferent about the shares. She said: 'It's difficult to get too optimistic because earnings expectations remain too high.'