LONDON -- Shares in Lloyds (LLOY 0.39%) (LYG -0.46%) are 10% off their high for the year. They are now just 2% more expensive than they were back at the beginning of 2013. By comparison, the FTSE 100 index is up 10%.
Like the rest of the banks, Lloyds fell recently following the Cyprus scare. Bank share prices then suffered again when their new regulator announced that it wants the sector to raise more capital.
Why I expect a big rise
The market could dramatically reappraise Lloyds shares when the company reports its first-quarter results at the end of the month. If investors come around to my analysis, the result could be a 20% share price rise.
Lloyds' forthcoming Q1 results could be the first announcement in a long time that does not contain huge provisions for Payment Protection Insurance (PPI) compensation payouts. So far, Lloyds has set aside 6.5 billion pounds to pay customers for PPI misselling. At the end of 2012, 2 billion pounds of this provision remained unutilized.
I also expect that impairments at Lloyds in 2013 will be considerably lower than they were one year ago. In 2012, writedowns on assets and loans totalled 5.7 billion pounds -- 40% less than the previous year.
Lloyds' first-quarter results, scheduled for 30 April, are a fantastic opportunity for the bank to demonstrate just how profitable it could be going forward. If the bank can show further provisions for PPI are unlikely and that impairments are still falling fast, 5.6 billion pounds could be added to group profit before tax for the full year.
Even better, recent comments from Business Secretary Vince Cable show that even he has been sticking up for the banks. We may have passed the peak of political pressure to punish the sector.
How high could Lloyds' shares go?
Six weeks ago, shares in Lloyds traded around 55 pence. Analysts expect that the company will make 5.6 pence in earnings per share for 2014. Rival banks Standard Chartered and HSBC today trade close ten times 2014 forecasts. I think that the banks will spend the next month demonstrating their value to investors. If Q1 results can inspire earnings upgrades, I would expect Lloyds' shares to end May trading around 60 pence.
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