The stock was one of the best performers in the market in 2012, returning 85.02 per cent to investors, and put on a further 64.61 per cent last year.
The stock took a hit after results on Thursday morning, however, and is 3.78 per cent down since then.
Performance of stock vs index over 3yrs
Source: FE Analytics
The bank reported statutory profits for the year of £415m before tax and a loss of £802m after tax. Net tangible assets per share were down to 48.5p from 51.9p. The main drivers of that loss were £3bn worth of impairments of assets along with £1.5bn losses attributable to restructuring, in particular the sale of the Project Verde chain of high street sites, and £3.5bn attributed to other legacy items, mainly PPI claims.
Losses were down from £1.4bn in 2012 and costs down from £10.1bn to £9.6bn. The company said that it expected to reduce costs further to £9bn next year, not including those of running TSB.
The bank also reported serious reductions in non-core assets, down 47 per cent on a risk-weighted basis, as it focused more on core business in the UK.
This included the sale of SWIP to Aberdeen.
The stock has become highly popular among UK fund managers since the start of the recovery and many of them are sticking with it.JPM UK Higher Income manager Thomas Buckingham (pictured right) said the results were solid, and reaffirmed Lloyds' status as the most improved in the retail banking sector.
“Yesterday’s results were reassuring from an impairment perspective, showing that the bank continues to make progress on the quality of its book,” he said.
“The capital position was shown to have remained comfortable, with core tier 1 remaining above 10 per cent – and hence Lloyds remains the UK domestic bank that we are least concerned about from a capital perspective.”
Performance of fund vs sector and index over 3yrs
Source: FE Analytics
Colin McLean (pictured right), manager of the SVM Global Opportunities fund and co-manager of the SVM UK Growth fund, is also holding on to the stock, although he cautions that the strong gains of the last two years are unlikely to be repeated.
“It has been re-rated a lot, and other European banks are catching up with that, because their balance sheets have been impacted in a big way by the housing and property market, so they are all being helped by the recovery there, and without that help they would have suffered more,” he said.McLean adds that although he expects stodgier growth, the UK housing recovery, supported by the Government’s Help to Buy scheme, should remain a tail wind.
“It is quite a good play on the further recovery in the property sector and housing, and that is moving out into the regions and away from London,” he said.
“The recent results show it’s now at the stage where it’s less able to keep on making adjustments for the past bad news and it has to be judged on how it is doing now.”
“It offers the participation that housebuilders do in the continuing recovery,” he added.
“It’s leveraged into that recovery.”
McLean warns, however, that this new era for the bank could mean that investors need to lower their expectations of its dividend-paying capabilities.
He notes that profits were below expectations, even after adjustments, which is one reason the market may have been less than enthused.
Many investors, however, are less concerned with profits than with the resumption of dividend payments.
The bank reaffirmed its intention to resume payments in the second half of this year and to work up to paying out 50 per cent of its earnings to investors.
The resumption of payments has been pushed back, which disappointed many investors.
However, Buckingham still says it’s worth holding for income investors.
“While the resumption of dividend payments now looks like it might come slightly later and at a slightly lower level, this does not detract from our view that the stock will be an interesting income prospect in the medium- to long-term,” he said.
McLean cautions that the bank may not have a free hand when it comes to the dividend.
There will likely be political pressure on Lloyds not to pay out too much of its earnings, particularly after bank lending to individuals and businesses shrank from 2012 to 2013.
McLean notes that there is some recent precedent for banks coming under pressure from politicians to limit dividends in Sweden.
The current expectation of 50 per cent is lower than the 60 per cent the market expected, Buckingham notes.
The other issue weighing on the bank is the sale of the Government’s remaining stake.
A tranche was sold off to institutions last autumn, but retail investors are expected to be offered some of the remaining shares this year.
The expectation of this is likely to depress the share price in the short-term, Buckingham says.
Graham Spooner, analyst at The Share Centre, thinks this is a reason for investors to avoid buying the bank for now, and he has a hold rating on it.
“Signs of improvement have pushed the shares to a premium rating over the last two years, albeit from a very low base,” he said.
“Over the last six months it has been trending sideways and investors could see this continue ahead of the Government sale as any upside in the share price could be limited due to the market overhang.”
“We continue to recommend investors ‘hold’ Lloyds. There are still hurdles for the bank to overcome and as we have seen from the increasing levels of provisions it is still suffering from previous mistakes.”
“The uncertain economic recovery and rules and regulations the banks face could continue to impact Lloyds.”
Performance of stocks vs index over 3yrs
Source: FE Analytics
McLean says that he is also finding similar opportunities in RBS, which he also has a position in.
“There are other banks that stand at a discount to tangible assets such as RBS, and a dramatic change in circumstances has been recognised by the markets,” he said.
For Lloyds, the challenge is to show it can generate returns on earnings and dividends like a “normal” bank, with its honeymoon recovery period well and truly over.
McClean does say that the seemingly endless stream of mis-selling scandals is likely to come to an end soon, with the issue to work out for bad loans made in the property sector.
“The bet on that is that the housing market is improving now. But it still took on through Bank of Scotland a lot of questionable property,” he warned.
