Life continues to get better for the Lloyds Banking Group (LSE: LLOY). The bank’s third-quarter results provided more evidence that the company is getting its house in order.
It also looks as if an improving UK economy and the government’s efforts to prop up house prices via the Help to Buy scheme could provide a nice boost to profits and the share price over the next few years.
Underlying profits are up by 20% so far this year, while the bank’s finances continue to improve. Unsurprisingly, the Help to Buy scheme is seeing Lloyds grant more mortgages, but its loan book is growing in other areas too.
The margin between the interest it gets paid on its loans compared with what it has to pay on the money it borrows (the net interest margin) is getting bigger as well.
With costs dropping down elsewhere, this bodes well for bigger profits in future. All in all, Lloyds looks well on track to start paying dividends again very soon.
But the risks have not gone way with Lloyds. It remains heavily exposed to a UK housing market that is being artificially propped up by the government. And unlike banks such as HSBC or Standard Chartered – which can fund themselves with customer deposits alone – Lloyds is still reliant on a decent chunk of more riskier wholesale finance.
Its shares are no bargain either, trading on 1.2 times its book value while making modest returns on shareholders’ money of about 10%.
That said, the shares have a fair wind behind them just now. Growing profits help the investment case while the shares will have a lot of support from City brokers looking to sell the government’s stake to the public – and from a government keen to keep the feel-good factor going, ahead of the election.
Throw in some chunky dividend payments and it wouldn’t surprise me if Lloyds’ shares hit 90-100p within the next 18 months.
Verdict: remains a risky punt