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Lloyds’ prospects are on the rise as increasing profits, declining bad debt and the likelihood of decreased state ownership has put the stock in a more favourable light with traders. It has taken many years to shake off the credit crisis, but the bank is now moving in the right direction. The part-nationalised lender revealed an increase in underlying first-half profit of 32% to £3.8 billion — the figure strips out any once-off costs such as PPI provisions.
Lloyds has put aside over £10 billion in relation to the mis-selling of PPI, and even though the provisions are becoming smaller it will still hang over the company.
The loan book at Lloyds is showing a major improvement, with the losses related to toxic loans dropping by 57% to £758 million. This is one of the best measurements of how much the troubled bank has turned around in the last few years, and the rising property market will assist the seventh-biggest lender in the UK.
The UK government still owns a 25% stake in Lloyds, but that has been brought down from 40%, and Westminster has plans to reduce its stake even further. In December, George Osborne outlined plans to start selling off small clips of the stock in an effort to lower the national debt. Mr Osborne will not be selling the stock under the price the previous administration paid for them, which was 73.6p, and the disposal scheme will last roughly six months. The aim is to take the government’s shareholding down to approximately 20%. A smaller government holding in Lloyds will allow the bank to take on more risk, and will give it the potential to become more profitable. At the end of last year the Bank of England ran a stress test and Lloyds had a tier one capital ratio of 5% — the pass mark was 4.5%.
Lloyds has raised over £600 million selling 50% of TSB Banking Group, and the bank will look to dispose of its remaining shareholding in the future. The bailed-out bank is tipped to start paying dividends again, and this will be welcomed by traders as the finance house hasn’t paid a dividend since 2008.
The consensus is for revenue of £18.59 billion, and adjusted net profit of £5.66 billion when Lloyds reveals its full-year numbers. These forecasts equate to a 1% decline in revenue and 39% jump in profits. The bank will reveal its second-half figures on the same date, and dealers are expecting revenue of £9.42 billion and adjusted net profit of £2.99 billion. The first-half number impressed investors with the revenue coming in at £9.25 billion and adjusted net income of £3.6 billion. Traders were anticipating £9.14 billion and £2.56 billion respectively.
Equity analysts are bullish on Lloyds. Out of the 32 recommendations, 15 are buys, 12 are holds, and five are sells. The average target price is 87.15p, which is 15% above the current price. Investment banks are less bullish on RBS. Out of the 33 ratings, four are buys, 20 are holds, and nine are sells. The average target price is 387p, which is marginally above the current price.
Aside from a brief period in November and December, the share price has been largely confined to the 70p-80p range. As was the case throughout much of 2014, buyers have stepped in around the 72p level, marking this zone as a consistent area of support. Intermediate resistance has been found at the 77p level, and this is the situation once again. The 100-week moving average is now entering the frame as support, while we find the price edging above the 50-week MA for the first time since early December. A first target on the upside is 80p, and then the December high of 81p, while a solid break higher targets 84p.