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Jupiter's Davies: three reasons why Lloyds' dividend may beat forecasts

by Steve Davies on Feb 17, 2014 at 15:25

Jupiter's Davies: three reasons why Lloyds' dividend may beat forecasts

Lloyds seems to have taken inspiration from central bank policy speeches with its measured tone and talk of shareholder distributions at a 'modest level.'

Yet, there is every reason to believe dividend pay-outs may prove much more generous than initially anticipated, with the bank’s share price also potentially seeing further upside over the next two years.

There are three reasons behind our cautious optimism.

Satisfying the regulators

First, Lloyds Bank is close to satisfying the Prudential Regulation Authority (PRA), the banking sector watchdog, that it has built up sufficient capital buffers to be allowed to start paying out dividends again.

The bank's core equity tier 1 ratio - a measure of a financial institution's ability to withstand potential future losses - stands at 10.3% of its risk-weighted assets. The company now believes this needs to rise to c11% and we believe Lloyds can achieve this by the end of the year or by early 2015 at the latest.

Meeting this key regulatory requirement should allow the PRA to give Lloyds Bank the permission to issue dividends for the first time since 2008.

Normalisation of earnings power

The strengthening of the bank's balance sheet is being accompanied by a 'normalisation' of the bank's earnings power - a second factor giving us grounds for optimism.

Shorn of its more esoteric banking activities, Lloyds has returned to being a bread-and-butter UK-focused retail and commercial bank.

Retail banks with decent market shares have the potential to make good returns and there is no reason why Lloyds would be an exception. The bank may have been hamstrung by payment protection insurance (PPI) payments and impairments on bad loans but these impediments are now receding.

The bank has also implemented an extensive cost-cutting programme that has resulted in a much leaner, more efficient institution. Against this background, Lloyds is finally starting to deliver what could best be described as normal levels of profit from a loan book that is now starting to grow again.

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