Consider Buying Lloyds Bank

Summary

• The UK government has divested its shareholdings completely and Lloyd’s Bank is now entirely in private hands.
• Other aspects should not be ignored but the worst looks to be over for
• Lloyds Bank is positioned to continue growth and produce solid returns.

In spite of uncertainty in regards to Brexit, Lloyds Bank (NYSE:LYG) appears to be a fairly valued investment opportunity. The 6% dividend is a nice concession while investors wait.

Lloyds Bank

Founded almost 250 years ago, Lloyds Bank plc is a British bank and its registered office is in London. The bank's branches are spread across England, Wales and many other parts of the world. It provides internet banking, mobile banking, and phone banking apart from traditional ways of banking. Some of the relevant banking products are current accounts, credit cards, loans, savings, ISAs, home insurance, motor insurance, mortgages, investments, and life insurance.

Brief Introduction and Important Milestones in the Last 20 years

• In December 1995, Lloyds Bank and TSB merged to form Lloyds TSB. However, it was another four years before the new bank became a high street name.
• In January 2009, in the midst of a global financial crisis, Lloyds TSB took over HBOS plc.
• Lloyds TSB became the Official Banking and Insurance Partner of the London 2012 Olympic and Paralympic Games.
• On 9th September 2013 Lloyds TSB once again became two separate banks.
• 2015 was a milestone year for Lloyds Banking Group as they celebrated the 200th anniversary of Scottish Widows, the 250th anniversary of Lloyds Bank and the 30th year of the Lloyds Bank Foundation.
• The Group emerged as the most profitable bank in the UK from 2012-2016. The Group has paid a dividend of over £5 billion to its shareholders.

UK Bailout and Lloyds Bank

In the aftermath of the financial crisis in 2008, the group had reported a loss of over £25 billion when Lloyds TSB took over Britain's biggest lender, HBOS, for £12 billion. As a part of the bailout, the UK Government had invested over £20.3 billion and acquired a 43% stake in the Group. UK Financial Investments Limited (UKFI) manages the UK Government's shareholding in the group.

Since 2013, the government has been slowly reducing its stake by selling off the shares in the Group. UKFI announced in October 2016 that UK Government's Treasury would sell the shares of Group over a period of 12 months as per a pre-arranged trading plan. UKFI had roped in the services of Morgan Stanley & Co. International PLC for this purpose. At the time of the announcement, UK Treasury owned approximately 6.5 billion ordinary shares, or approximately 9.1% stake in the Group. As of now, it is reported that the government has divested its shareholding completely and the bank is now completely in private hands.

Investigating the Fundamentals of Lloyds Bank

• The bank's cost-to-income ratio is 47.7%, which is the lowest among the big four UK banking groups.
• The bank's net interest margin (the difference between the interest income generated and the interest paid to lenders) is 2.72%, which is certainly quite healthy.
• Its asset quality ratio (the loan impairment charge as a percent of loans and advances to customers) is only 0.14%, which is one of the lowest.
• With CET1 (common equity tier) ratio at 13.4% as per the latest published figure, the bank assumes a strong capital position.
• The bank has demonstrated its resilience in the Bank of England's latest stress tests this year.
• The dividend yield with Lloyds has reached over 4%, which is certainly attractive by any standards.

Dividend Payments Resumed only in 2015 post 2008 Financial Crisis

The following table provides recent dividend history of the stock.

Dividend Type	Dividend Ex. Date	Amount in Cash	Payment Date
Cash	4/2/2015	0.047	5/29/2015
Cash	8/12/2015	0.045	10/8/2015
Cash	4/6/2016	0.116	5/27/2016
Cash	8/10/2016	0.044	10/11/2016
Cash	4/5/2017	0.113	5/26/2017

Click to enlarge

Source: Dividend History

There is no doubt that the worst is over for Lloyds Bank and the stock will continue to consolidate in the coming months. However, there are many other aspects that cannot be ignored.

The UK Economy

Because 97% of the bank’s business is located in the UK, the performance of the UK economy in the coming quarters becomes extremely crucial for long-term growth and therefore, the valuation of Lloyds stock in the days ahead.

The following graphics show the GDP growth rate of the UK economy.

Source

While the GDP growth rate is hovering between 0 and 1 percent for last several years, the moot question is whether the UK economy will show any promise of registering higher growth in the coming quarters? The economic experts have some differing opinions on this. John Van Reenen, a professor of applied economics at the MIT Sloan School of Management, US, declared in a recent interview, "Britain’s departure from the European Union could cause output losses of as much as 9.5 percent" (Independent). That means the biggest loss for the UK economy would be from Brexit (exit from the European Union) in the coming years. If that is the case, then in spite of the strong fundamentals, Lloyds Bank may not grow in terms of profits as expected. The impact of Brexit may not be known until the beginning of the 2018 including whether it causes output reduction and job losses for the UK economy. If that happens then the stock may make a southward movement.

Recent High/Lows

Lloyds Bank's stock is listed on New York Stock Exchange as the symbol LYG. On July 7, 2017 the stock closed at $3.51. In recent times, the stock peaked at $5.61 on 5/13/2015 and the low $1.41 on 5/1/2012 (the lowest after the financial crisis).

LYG data by YCharts

Technical Perspective on the Stock

While the stock is fundamentally strong, it does not mean that it will necessarily make an upward move. A lot will depend upon how the FTSE 100 (the UK stock index) performs in the coming months. Currently, the FTSE is hovering around 7350. If the FTSE 100 moves upward and gives two immediate closes above 7550 in the coming months, and at the same time, LYG (Lloyds Bank) closes above $3.87 then there is a good possibility for the stock to move to $4.50. If the FTSE 100 moves downward to around 7110 then there are good chances that LYG would move to around $3.25.

^UKX data by YCharts

Recommendation

Currently, the UK stock market is in an indecisive state and it may be better to wait for more time before investing. It would be wise to watch the movement of FTSE 100 and LYG until it reaches any of the above levels.

Moreover, it is highly desirable to watch the performance of the UK economy in the coming quarters as the general forecast by the economists is that it may move southward due to Brexit. In all likelihood, the LYG stock would follow the UK stock market trend in the coming months.

However, with a 5% yield and potential growth, I believe LYG is worth adding a position to my portfolio below $3.50 and it would be smart to continue to watch for other buying opportunities closer to $3. As long as the UK economy is stable or improving, I expect Lloyds to be an outstanding investment long term.

As always, do your own research and due diligence and you should also talk to a financial advisor before making an investment decision.

Analyst’s Disclosure: I am/we are long LYG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Because I am not an investment professional, this article is not the equivalent of investment advice. This should not be interpreted as an investment recommendation as the opinions expressed in the article are entirely my opinions. The details and data in the article should only be used for informational purposes. Anyone who believes the research above warrants further action should do their due diligence on the material to determine whether or not the investment is suitable for them. Investors need to perform their own due diligence and it would also be beneficial for them to seek advice from the broker-dealer or financial advisor before making an investment decision.