Interactive Investor

Lloyds bulls out in force

2nd March 2015 14:10

Lee Wild from interactive investor

It's been a long wait, but Lloyds is paying shareholders a dividend again. It is a major milestone for the lender and talk now shifts from "when" to "how much?" And the discussion has become increasingly optimistic. Many believe the bank is due a re-rating, too, which could drive the share price considerably higher.

"The combination of recovering statutory profit, non-core rundown and DTA (deferred tax assets) utilisation is likely to drive Lloyds to be one of the most capital generative banks in Europe in coming years," says UBS. "For a bank that starts this phase already above its target capital ratio (12.8% vs the newly announced 12%) - the excess capital potential is material."

By next year, the broker thinks Lloyds will have delivered a cumulative 7% dividend yield, and have 16% of current market capitalisation in excess capital.

"Lloyds is already above its revised CET1 target, and remains highly capital generative (150-200bps capital generation pre-dividend now expected annually). We continue to see value in Lloyds' cash generative business model, and reiterate our Buy rating with a GGM based PT of 100p."

On Friday, Lloyds said it made an underlying profit of £7.76 billion in 2014, up 26% as impairments fell by 60% and costs came by 2% to £9.4 billion. Including an extra £800 million of payment protection insurance (PPI) provisions in 2013 and last year's £710 million pension credit, statutory pre-tax profit surged fourfold to £1.76 billion.

Meanwhile, the post-dividend Common Equity Tier 1 (CET1) ratio - a key measure of a bank's financial strength - increased to 12.8%, evidence that Lloyds has seriously de-risked the business.

Lloyds trades on 1.5 times estimates for 2015 tangible net asset value (TNAV) for 13.3% return on tangible equity (RoTE) in 2016. However, UBS believes that if Lloyds manages a RoTE of 17% by 2015 on a lower than we presently assume cost of equity of 9%, "we think this would support a share price of c.130p".

Nomura

Elsewhere, Nomura reckons that if Lloyds can reduce the difference between underlying and reported earnings, regulators will be far more likely to allow payout ratios to rise.

"PPI, TSB sale, and restructuring costs still remain a drag through 2015, but as we get into 2016-17, we think this rerating potential will likely come through," says the broker. "As Lloyds dividend yield improves from 2.9% in 2015 to 7% in 2016, on our estimates, with upside potential driven by a 16E 14.8% CET1 ratio, we expect Lloyds to rerate from a 16E P/E of 9.2x closer to north of 12x (where the Swedish banks trade)."

It has a 'buy' rating and 90p target price on the shares, but thinks that increased political rhetoric around banking ahead of the May elections, plus with the drip share sale programme, will likely "put a cap on Lloyds' near-term performance".

Deutsche Bank

"An inaugural dividend of 0.75p, while welcome, is nothing compared with the 14p in dividend per share we forecast for 2015-2017 and 12p of capital we expect Lloyds to have earned above its 12% CT1 target at end 2017," says Deutsche Bank.

"A special dividend will be inevitable in our view. Our earnings estimates and 94p target price are unchanged. Trading at 9.7x 2016 EPS and yielding 4% this year we think the stock far too cheap and retain our Buy recommendation."

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.