I believe the Lloyds (LSE: LLOY) share price will smash the FTSE 100 in 2019. This is quite a strong statement to make, but I think it will come true partly because shares in the bank are already outperforming the UK’s leading blue-chip index after only a few months.
Year-to-date, shares in the UK’s largest mortgage lender have provided a total return for investors of 25.5%, compared to a gain of just 11.9% for the FTSE 100.
In my opinion, investors have been returning because the bank has finally proven that it’s back on a stable footing. After years of restructuring and cost-cutting, Lloyds has now returned to growth and is prioritising shareholder returns.
And it looks as if the bank isn’t planning to reign in its ambitions anytime soon. It has one of the lowest ratios of costs to revenues among Britain’s high street banks, and management is planning further efficiency savings over the next 12 to 24 months.
Management wants to reduce spending from around £47 of every £100 in revenue to the low £40s by the end of next year. That’s a big ask, but the company is making substantial investments in IT infrastructure, which should allow it to reduce costs by an estimated £750m, putting it well on the way to reaching the cost savings goal.
Lloyds plans to switch its technology systems to a new core banking system built by tech startup Thought Machine. The company owns 10% of this business which was founded by a team of Google engineers. By using the Cloud, Thought Machine claims its banking platform is cheaper to run, faster, and provides more data on customers transactions than existing infrastructure. Lloyds currently spends around £2.2bn developing and maintaining its old IT systems, so efficiency savings of £750m could give a big boost to the bottom line.
The potential savings that can be had here are incredible, but Lloyds has to be careful not to repeat the mistake TSB made when it switched its old systems onto a new platform. The botched transition made national headlines and crippled the bank for weeks. Hopefully, Lloyds has learned from this mistake.
Lower costs are not the only reason why I’m positive on the Lloyds share price. Management is also investing a substantial amount of time and effort on growth initiatives.
The bank recently announced it’s planning to get into the wealth management business via a partnership with a leading UK wealth manager and is trying to bulk up its credit card business after the acquisition of MBNA.
These initiatives have convinced City analysts that Lloyds’s recovery is complete and they have substantially increased their growth forecasts for the bank over the past 12 months.
The City is now expecting earnings per share growth of 22.5% to 7.8p for 2019, which puts the stock on a forward P/E of just 8. By comparison, shares in some of the bank’s major international peers are dealing at P/Es in the low teens. This tells me Lloyds is undervalued at present.
On top of this, the City reckons the bank will return a total of 3.5p per share to investors via dividends this year, giving a dividend yield of 5.5%.
With all these tailwinds behind the stock, I think it’s difficult to be bearish on the bank at present.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019