Why I’m holding shares in Lloyds Banking Group.

At close of trade last Friday, the share price of Lloyds Banking Group was 65.32p, which is painful for me, having purchased the shares at an average of 73p. Investors are understandably worried, given the bank’s UK focus, and the economic uncertainties as the Brexit negotiations drag on. However, I remain firmly bullish about the long-term prospects of the bank.

 

The government has finally ended the taxpayers’ stake in Lloyds Banking Group, in effect fully privatizing it, a decade after it was rescued on the brink of collapse. Since then the bank has also reported a pre tax profit in 2016 of £4.4bn, which is roughly the same as what it was earning before the global financial crisis of 2008. Given this and the fact the bank trades below the price at which it was bailed out suggests immense upside potential.

 

Also, the bank paid dividends in 2016 of 3.05p, a retrospective yield of an inflation-beating 4.8%. This is also above the average yield of 3.5% in the FTSE 100. Analysts are forecasting dividends of roughly 4 pence and 5 pence in 2017 and 2018 respectively, leading to forward yields of 6.3% and 7.8% respectively. Adding in forecast PE ratios of 8.3 in 2017 and 2018, capital growth could well be on the cards alongside the impressive payouts forecast.

 

This isn’t without its risks. For starters, interest rates have been cut to 0.25%, effectively squeezing the margin on the profitability on the banks’ lendings, although there appears to be growing pressure on the Bank of England to reverse this, given the votes have become more polarized as of late.

 

Payment Protection Insurance payouts has reared its ugly head yet again, with the bank having to set aside an additional £1bn to meet claims. However, according to research by Hargreaves Lansdown, this is likely to be the final provision the bank has to make.

 

There are of course other contingencies that cannot be predicted in advance. However, with the bank boasting a CET1 capital ratio of 13.5% (significantly above the minimum requirement of 4.5%, I think the bank is in pole position to weather any such storm and be able to maintain its progressive dividend policy.

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