After a momentous year in 2013, when shares in the bank soared by 61%, Lloyds (LSE: LLOY) (NYSE: LYG.US) has been a major disappointment in 2014. Thats because it is currently down 4.2% since the start of the year, which is well behind the FTSE 100s 0.5% gain over the same time period. However, Lloyds could have a much brighter future and could help you to retire rich. Heres how.
A Sound Strategy
Lloyds strategy in recent years is proving to be a sound one. Its quite simple: sell off the parts of the bank that are either too risky, provide little in the way of reward, or that tie up too much of the banks capital. What Lloyds should be left with at the end of the process is a more profitable business that requires a lot less capital than it otherwise would. In the long run, this could be great news for shareholders.
An Improving Economy
Clearly, all UK-focused banks are heavily reliant upon the fortunes of the UK economy. However, it could be argued that Lloyds is even more reliant upon it than most. Thats because, under its former guide as HBOS, Lloyds acquired a relatively large number of struggling UK businesses that had previously been borrowers of the bank.
At the time, it was said that this was a logical move: instead of obtaining a relatively small proportion of the money owed to it via administration, Lloyds took equity stakes with a view to those businesses being turned around.
So, with the UK economy continuing to show signs of life (and being among the fastest growing economies in the developed world) this could provide a turbo-boost to Lloyds via small business growth. Furthermore, with risk-appetite being the highest it has been since before the financial crisis, demand for loans helps to grow Lloyds loan book and its bottom line.
Despite being leaner, less risky and set to return to profitability this year, Lloyds still trades on a relatively low valuation. For example, shares in the bank currently have a price to earnings (P/E) ratio of just 9.7 and, with earnings forecast to grow by 7% next year, Lloyds seems to be on a sound financial footing through which to aid your retirement fund.
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Peter Stephens owns shares of Lloyds Banking Group. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.