The last month has seen the Lloyds Banking Group PLC (LON:LLOY) (LLOY.L) share price move 4% higher. That may not sound like a particularly large amount of growth. However, it if continues to increase at the same pace it could mean growth of over 50% over the course of a full year.
While such a large rate of growth may seem improbable with Brexit just around the corner, I feel the stock has strong growth prospects. Although its trading conditions may deteriorate to some extent ahead of the end of March 2019 and even thereafter, the business seems to have improved significantly in recent years.
For instance, Lloyds has become financially stronger and now performs relatively well in stress tests. It has become more efficient and now has one of the lowest cost to income ratios in the FTSE 100 banking sector. These factors could help it to deliver further share price growth even though it remains reliant on the UK for all but 3% of its income.
Additionally, the company has a valuation which suggests that the stock market has already taken into account the uncertain outlook for the UK economy. Its P/E of 9, price to tangible book ratio of 1.3 and dividend yield of 6% point to a stock that offers a large margin of safety in my view. Therefore, I think growth of 50% in its share price in the long run would not put it on an excessive valuation by any means.
Sure, the recent run in the Lloyds share price may not continue. Its momentum will almost inevitably be checked and there could be significant volatility ahead as the UK moves towards Brexit. But with a low valuation and a business model which seems strong compared to many large-cap sector peers, there seems to be investment appeal on offer from the formerly part-nationalised banking stock.