LONDON -- Lloyds Banking Group (LLOY +0.25%) (LYG +0.58%) was formed from the merger of Lloyds and HBOS. This was a marriage put together at the very worst of the financial crisis. Halifax's losses nearly crippled Lloyds. The newly forged bank was forced into taking a government bailout. Today, the taxpayer owns around 40% of Lloyds Banking (Lloyds).
Soaring shares in 2012
This morning, shares in Lloyds rose above 47 pence. This is the highest they have been since the summer of 2011.
In the last year, shares in Lloyds are up an enormous 93.1%. No other company in the FTSE 100 (UKX) has outperformed the index more in 2012. In the last month alone, the shares are up 7.6%.
Lloyds' rise (and fall) in the last two years has been driven by the eurozone crisis. As fears over Greece, Italy and Spain hit a crescendo at the end of 2011, shares in Lloyds could be picked up for just 23 pence.
The banking sector has enjoyed a broad recovery since the ECB announced a bond purchasing plan in September. As panic has abated, the perceived risk of investing in the banks has fallen. This has caused share prices to rise significantly.
Why I hold
I bought Lloyds shares before the eurozone crisis reared up. I was convinced that if the bank did not need to raise more funds, then the shares were cheap. This logic still stands. My stake is well into profit.
Now though, I believe that there is another, bigger reason to own the shares: the bank's ongoing recovery.
Much media and investor attention has focused on the costs of paying out Payment Protection Insurce misselling claims. This has offset the dramatic reductions in impairments reported by Lloyds.
Hopefully, 2013 will see the end of money being set aside for PPI. In the bank's last quarterly statement, impairments were reported as 40% less than the same period a year ago. If this can be maintained, Lloyds profits will quickly start to ratchet upwards.
Analysts expect Lloyds to report 2.5 pence of earnings per share for 2012, rising to 3.8 pence for 2013. At 47 pence, the market is clearly expecting further profit growth beyond then. And why not? Before the financial crisis, Lloyds was making a net profit of around 3 billion pounds a year. Following the Halifax acquisition, the bank is now much bigger.
Next stop: 50 pence?
As investors turn more bullish, I expect Lloyds shares will continue to rise. If the shares can reach 50 pence, my next target will be 56 pence. This is the price at which taxpayers will break even on the bailout.
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