The 2013 Outlook for Lloyds

LONDON -- In this festive mini-series, we look at the 2013 prospects for some of your favorite FTSE 100 (UKX) shares. Today, it's the turn of Lloyds Banking Group  (LSE: LLOY  ) (NYSE: LYG  )

Lloyds' shares have gained a whopping 81% during the course of 2012, compared with a 6% rise for the Footsie. The group has made good progress in its strategy of de-risking its balance sheet, reducing its non-core assets and getting back to being a simple, customer-focused U.K. retail and commercial bank.

In a Q3 statement released in November, Lloyds' guidance for the full year ending 31 December included a cost base reduced to around 10 billion pounds (two years ahead of the original plan), and impairment charges of 6 billion pounds and a reduction in non-core assets of around 38 billion pounds (both ahead of the targets set at the start of 2012). If City scribblers' forecasts are right, Lloyds should also deliver a pre-tax profit of around 2.7 billion pounds compared with a loss of 3.5 billion pounds in 2011.

The results, which will be released at the beginning of March, will also see Lloyds provide an update on Payment Protection Insurance (PPI) mis-selling claims. The company expects to have better visibility by then on the ultimate likely cost of the PPI scandal, for which its current provision is 5.3 billion pounds.

Finally, shareholders should get some idea in the coming year of whether Lloyds will resume paying dividends in the near future. It has been reported in the press that chief executive Antonio Horta-Osorio is keen to pay a small dividend in early 2014, but that the Financial Services Authority has threatened to block the move on the view that the bank should hang on to all capital to protect itself in the event of a break-up in the eurozone.

Lloyds has clearly made good progress in 2012 but, after the storming rise in the share price, how does the valuation look now and have the shares got further to go in 2013?

At a recent share price of 47 pence, Lloyds' 12-month forward price-to-earnings (P/E) ratio of over 12 doesn't look too attractive compared with more solid banking citizens HSBC and Standard Chartered, whose P/Es are both nearer 10.

However, on an assets-valuation basis, it's a different story. HSBC and Standard Chartered are both trading at a premium to tangible net asset value. In contrast, Lloyds started 2012 at a 56% discount and, despite the year's mammoth share-price rise, remains at a discount -- albeit a much narrower 17%.

While there's some scope for the discount to close further, it looks like the biggest gains were to be had by investing at the lows of the past 12 months... And before anyone says, "Why didn't you tell us that at the time?", I did highlight Lloyds' shares for you this time last year when they were trading at 24 pence!

But let's not get too carried away: If bearish fears of a second financial tsunami prove well founded, Lloyds' shares are likely to sink even faster than they've risen this year.

If that were to happen, City super-investor Neil Woodford, who famously got out of financials before the credit crunch and who is still steering clear of banks, will once again take the plaudits. Woodford's funds have trounced the market over the past 15 years, so his views and approach to investing are certainly worth considering.

You can do just that by helping yourself to a free and exclusive Motley Fool report that tells you all about the master investor's enormously successful strategy and eight of the blue-chip companies he currently favors.

This report is free to private investors for a limited time only, but it can be in your inbox in seconds for some holiday reading: simply click here.

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