Dividend and rate rises beckon, but Lloyds is a dark horse

IT’S been a long, hard road to recovery for some banks since the financial crisis. Restructuring, cost-cutting and billions of pounds in PPI compensation payouts mean they are out of favour with many investors.

Yet some are starting to show interest again with the deadline for payment protection insurance payouts fast approaching. Lloyds Banking Group set out a new three-year plan in February, warning of more cost-cutting to come. It has already paid out £18billion in PPI compensation and expects to pay out more before the deadline in August 2019.

So far, not so good. Midas recommended the stock in April last year, when the shares were 69¼p. Today they are 62½p.

But Lloyds is conducting a £1billion share buyback – with some brokers predicting more to follow – and it has sold its Irish mortgage business, which lost it £40million last year.

Optimists point to widely expected interest rate rises. Lloyds, with £415billion in customer deposits and a 27 per cent share of UK current accounts, could be one of the biggest beneficiaries.

Higher rates mean bigger profit margins. Already pre-tax profits for this year are forecast to reach £6.8 billion, which may allow the dividend to be increased. It was raised 20 per cent last year from 1.70p to 2.05p, meaning the shares yield 5.5 per cent, higher than the average 4 per cent of the FTSE 100.

But Lloyds’ share price has continued to slip from its January high of 72p. Investec has a target price of 77p for the stock. Others fear that higher interest rates, far from increasing profitability, could lead to more delinquencies and bad debt write-offs.

Russ Mould at broker AJ Bell says: ‘The UK banking market is mature, competitive and pretty tightly regulated, so it isn’t going to be easy to grow.’ Midas verdict: Hold. The global banking sector is down 8.8 per cent so far this year, while the FTSE All-Share Index is down just 1.6 per cent so there is room for an upswing. Lloyds’ retail focus is viewed as a positive by optimists, though if higher interest rates lead to more consumers missing payments on loans, mortgages and credit card debt then it could be the bank’s undoing. Traded on: Main market Ticker: LLOY Contact: lloydsbankinggroup.com or 0371 384 2990