Bank shares have been punished relentlessly this year andLloyds (LSE: LLOY) is no exception. Indeed, the banks shares have fallen by 20% year-to-date, underperforming the wider FTSE 100 by a staggering 10%.
And its impossible to say if Lloyds shareswill fall further. A few months ago almost nobody would have predicted that the shares of one of the UKs largest banks would fall 20% in just six short weeks, but it has happened.
However, away from the stock market, Lloyds is still powering ahead. While the banks shares could fall another 20%, depending on wider market trends, investors should concentrate on the underlying performance of the banks business before selling up.
Underlying growth
As one of the UKs largestbanks,and the UKs largest mortgage lender, its possible to gaugeLloyds success by looking at underlying lending trends for the UK economy. For example, according to TradingEconomicsthe number of loan approvals for house purchase in the UK increased to 70,840 in December 2015, better than market expectations and higher than the reported 70,420 in November.
Whats more, the number of approvals for remortgaging during December was 41,708, higher than the six-month average of 39,540, and the number of approvals for other purposes was 12,258, compared to the average of 11,725. In other words, the UK consumer is still borrowing, which is great news for Lloyds.
Also, Lloyds is set to benefit from the low oil price as consumers save, or pay down debt with the money saved from lower fuel prices. Then theres the UK housing market to consider. The market is still growing and average selling prices are increasing, which is once again only good news for Lloyds and the banks loan book.
No reason to panic
Lloyds underlying business is performing well andbased on the strong performance of the UK economy, its possible that Lloyds earnings could continue to expand next year. City analysts expect the group to report earnings per share growth of 3% for full-year 2015 but current forecasts are also suggesting that earnings are set to fall by 8% during 2016. While this is disappointing, evenaccounting for an 8% fall in earnings, Lloyds is trading at an attractive 2016 P/E of 9.6.
Then theres the banks dividend potential to consider.Lloyds is planning to ramp up its capital return to investors over the next few years. The bank is already sitting on more capital than regulators demand, and the group is targeting an ordinary dividend payout ratio of at least 50% of sustainable earnings.Based on this objective, analysts have pencilled-in a dividend payout of around 5.6p per share for 2017 a yield of almost 10% based on current prices.
The bottom line
Overall, Lloyds shares may fall further in the near term but the banks underlying business continues to produce results and the shares are set to support a yield of 10% by 2017.
Income investments like Lloyds are the perfect way to build wealth over the long term. By reinvesting the dividends received from such investments, you can compound your money steadily without much effort at all.
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Rupert Hargreaves has no position in any shares mentioned. 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.