After a weak performance of Lloyd Banking Group Plc (LLOY.L) share price last year, the stock is getting traction among the investors. The lender is trying to put things in the right place to generate good returns. The lender has been planning to invest up to 3 billion pounds for its digital growth. This could lead to increase its competitive advantage through better customer services, while the lender is also reducing its operating expense by closing its non-profitable branches.
As per recent management meet between Lloyd and JP Morgan, JP Morgan has stated that they see Lloyds as the best positioned bank in the UK due to its strong capital generation, which underpins its ability to continue growing dividends and return excess capital through share buybacks, while absorbing pressures from weaker UK growth and conduct costs. Lloyds is also aiming for best-in-class Cost/ efficiency within the sector with a target of low 40s alongside a £3bn investment program. This allows the group to improve its competitive positioning in underrepresented areas such as Wealth and SME and creates growth opportunities. The shares were lately trading at a single digit 2019E PE and this represented a discount to many peers with a good cash yield.
The Wealth opportunity
Following the disposal of St James’ Place several years ago, Lloyds’ market share in Wealth has reduced to low single digit and management aims to address this through the recently announced JV with Schroders. Lloyds aims to expand in the Wealth market using its low cost/income ratio as a driving force behind low prices. The Group aims to be a Top 3 player in five years and double assets under management (1H18 of £151bn) through three main channels: 1) A self-trading platform to enable customers to trade without any advice; 2) Advice proposition for customers with +£100k investable assets but at a lower cost compared to competitors through the Schroders JV; 3) Advice and management proposition for customers with +£1m investable assets through the Cazenove Capital JV with Schroders. This will transform Lloyds into a full-service provider covering Banking, Insurance and Wealth with these secondary ventures providing a stable, annuity-like income.
£3bn strategic investment plan and low 40s CIR target underpin Cost flex, as Lloyds operates the largest digital bank in the UK with a decent market share and as the digital channel continues to grow in importance, we see incremental benefits of Group cost reduction and savings recycling into further investment contributing towards a cycle of a lower cost/income ratio.
Current account growth strategy has produced +13% CAGR growth since 2014. Retail and Commercial Banking current accounts grew by +13% CAGR from 2014 to 1H18 and now represent 26% of deposits compared to 16% of deposits in 2014.
Brexit overhang has compressed valuations, but management remains confident on the stability of the mortgage market, as Lloyds have a unique insight into the UK economy through its market share of current accounts and predominately UK-based credit exposures. It is also confident that a Hard Brexit scenario will have a manageable impact on the Bank as characteristics of the mortgage market, such as the high proportion of home-ownership, consumers' liability for debts, and the shortage of housing stock, might bring some balance.
About the Lender
Lloyds is a high street London based lender, offering wide ranges of banking and non-banking services primarily in the UK. Its services portfolio consists of current and savings accounts, credit and debit cards, short and long-term loans, unsecured loans, mortgages, protection and investment products, motor finance, and bonds and syndicated loans. They are also engaged in offering wealth management services, capital market services, foreign exchange, private equity and leasing services.
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