Investors in Lloyds Banking Group (LSE: LLOY) have enjoyed some respite over the past six months, withthe share price climbing almost 25% in that time, to 65.5p. However, that still leaves the stock below its 52-week high of 74p. What will it take to get this bank moving again?
Brexit blowback
The EU referendum was a blow, as markets assumedthe subsequent slowdown in the UK economy would hit Lloydsparticularly hard, given its UK domestic focus. However, Brexit still hasnt delivered the expected killer blow, with GDP up 0.6% in the final quarter of last year. Suspicions are likely to remain, though, and we shouldexpect further turbulence when Prime Minister Theresa May triggers Article 50, on what may be a hard Brexit, in March.
Lloyds looks tempting valuation-wise, trading at just 7.7 times earnings. However, its price-to-book ratio stands at exactly 1, which suggests it isnt particularly undervalued, at least compared to Barclaysat 0.6 and beleagueredRoyal Bank of Scotlandat 0.5. Lloydsdismal forecast earnings per share outlook isanother worry, with analysts anticipating three successive years of declines, starting with -17% in 2016, followed by -4% this year and -7% in 2018.
Income hero
Clearly,investing in Lloyds is far from a one-way bet. At least the dividend seems to be heading in the right direction. Todays 3.4% yield is covered a handsome 3.8 times, giving plenty of scope for progression, as the bank aims to pay out 50% of its sustainable earningsto shareholders. By the end of 2018, investors could be pocketing a juicy yield of 6.1%, which is where the true investment case for Lloydsnow lies.
One shadow thats been hangingover Lloyds is now fading, with news today thatthe UK government is cuttingits stake to just under 5%, as it looks to take the bank entirely private in the next few months. However, UK consumer confidence is fragile,fallingin January, as fears of a hard Brexit mounted, according to todays data from the European Commission.
Margin call
Director Jennifer Tippenhas been charged with helping Lloyds prepare a three-year business plan toprotect the lender from record-low interest rates, which are putting pressure on net lendingmargins. This is a concern for all the banks: interest rate hikeswould allow them to quietly increase the margins on their mortgage lending and savings rates. Will they get what they want?
Analysts have been forecasting an interest rate hikefor years, typically giving the vagueprognosis of within the next 18 months. Like tomorrow, the next 18 months never actually comes. This year could be different, with CPI hitting jumping to 1.6% in December and further leapsexpected due to the weaker pound, andsome forecasters suggesting Januarys number could exceedthe Bank of Englands 2% remit, thentop 3% by year end.
I still think the Banks monetary policy committee will be slow to act given Brexit uncertainties. That could leave Lloyds facing Brexit uncertainty and consumer anxiety,without the cushion of higher interest rates. However, these negatives wouldnot deter me from buying into the bank today. Todays 65.5pentry price is right. The yieldcurve is exciting. If you can afford to hold for the long term, I believe you should make money from this stock.
Don’t fret about Brexit
The doom-mongers said Brexit would be a disaster for the UK, until the FTSE 100 surprised everybody by rebounding to new highs.
However, this is still a phoney war and the turbulence may return with a vengeance once Prime Minister Theresa May triggers Article 50.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended Barclays. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.