By Geoffrey Smith
Investing.com -- Tuesday's StockBeat ended with the suggestion that Britain's banks offered the safest - if less exciting - all-round reopening bet in Europe right now. Results out on Wednesday from Lloyds Banking Group (LON:LLOY) support that case.
The U.K.'s third-biggest banking group by assets reported earnings well ahead of expectations in the final quarter of 2020, with pretax profit of 792 million pounds ($1.12 billion) as opposed to consensus forecasts of 471 million. It also reinstated its dividend payment at 0.57 pence a share, the maximum allowed by the U.K.'s regulator at present.
Given that the bank's core tier 1 capital ratio - a key measure of financial strength - remains at a generous 16.2% even after the payout, it is not hard to imagine dividends rising quickly again as residual concerns about the pandemic fade: Lloyds management only targets a ratio of 13.5%, which is itself a full 2.5 percentage points above what regulators demand. The surplus capital is there, waiting to be returned to shareholders who have had a rough ride over the last year.
Regulatory constraints are one reason why Lloyds (NYSE:LYG) stock remains so far below its pre-pandemic level, despite rising another 1.7% by mid-morning in London to a new 52-week high. Hence the importance of when and how far they will be lifted.
The outlook on this point is getting better by the day: the phased ending of lockdowns and social distancing requirements by July, announced by Prime Minister Boris Johnson on Monday - will remove, or at least sharply reduce, the threat of Lloyds' loan book going sour; economic recovery will ensure that the Bank of England can slowly dial down its talk about taking interest rates below zero, which would have the same negative effect on lending margins that it has had in the Eurozone.
To cap it all, the U.K. government is about to extend the tax holiday on house purchases in its annual budget, according to a report in The Times on Wednesday. That will help keep the U.K. housing market's show on the road, ensuring that the U.K.'s biggest mortgage lender can keep churning out new loans for at least another quarter, and possibly longer: Lloyds said on Wednesday that its mortgage lending business started 2021 with "a strong pipeline" after accelerating growth in the second half of last year.
The day will come, of course, when the government can no longer kick that can down the road. However, by that time, the higher-margin businesses of consumer and auto lending should be firing again. One of the standout slides from Lloyds' Q4 presentation is the sharp deleveraging by households last year, with deposits growing over 10% and credit card balances falling by 19%. That suggests ample scope for growth as people regain their freedom to spend.
Lloyds's story is common to many retail-heavy banks in Europe, but its history of relatively solid governance has generally enabled it to trade at a sizeable premium to them. However, Investing.com data suggest it's currently trading at a substantial discount - at 0.57 times book value compared to 0.75 for peers. Barring disasters with the reopening - which can not be ruled out given the cack-handedness of the government's pandemic management last year - that anomaly should be short-lived.