When will Lloyds Banking Group PLC’s underperformance of the FTSE 100 come to an end?

Could Lloyds Banking Group PLC (LON:LLOY) (LLOY.L) deliver improving performance versus the FTSE 100 (INDEXFTSE:UKX)?

Lloyds Banking Group PLC
Lloyds Banking Group PLC

While the FTSE 100 has experienced a disappointing 2018 so far, the performance of the Lloyds Banking Group PLC (LON:LLOY) (LLOY.L) share price has been worse. The index is down 7% year-to-date, while the bank has declined by 18% during the same time period.

In my view, investors are becoming increasing unsure about the prospects for the bank as a result of its UK focus. It relies on the UK for almost all of its income and, although it has not reported challenges due to Brexit, it may be weighing on investors’ minds in my opinion. As a result, they may be demanding a larger margin of safety.

However, since the stock now has a P/E ratio of under 8 and a price to tangible book ratio of around 1, I wonder if the stock’s valuation may already factor in its potential difficulties. And since PPI is due to come to an end and interest rates are currently forecast to rise over the next couple of years, the company could even enjoy improving operating conditions over the long run.

I’ve been impressed with how Lloyds has reshaped its strategy in recent years. Although it has not yet been reflected in a higher share price, it has been able to improve the strength of its balance sheet in my view, while also becoming more efficient. Evidence of this can be seen in its cost to income ratio, which is among the lowest of the FTSE 100-listed banks.

Alongside this, is it investing heavily in digital opportunities, while also reducing the scale of its branch network. These changes could catalyse Lloyds’ EPS growth in the long run in my view, and may be able to help it to outperform the FTSE 100. In the meantime, though, further volatility could be ahead as the Brexit process moves towards its conclusion.

About Robert Stephens 5431 Articles
Robert Stephens is a CFA Charterholder and an Equity Analyst by trade. He is a passionate private investor who has been buying and selling shares for many years, owning a wide range of UK shares in the process. He has written for Citywire and The Motley Fool US and now runs his own business. To contact Robert, please email info@investomania.co.uk or use one of the other contact methods available on the 'Contact Us' page