LONDON -- While crippling austerity in Europe has put the brake on growth rates in Europe, a backdrop of accommodative central bank action, elevated commodity prices, and rising personal affluence levels has created an exceptional investing opportunity in developing countries.
The divergence between traditional and emerging markets is borne out by latest International Monetary Fund projections, which puts U.S. growth at 1.9% in 2013, while eurozone GDP is set to dip 0.3%. Conversely, emerging markets are anticipated to expand 5.3% this year.
Bubbly activity in developing geographies can create large opportunities for many London-listed firms. Today, I am looking at Lloyds Banking Group (LSE:LLOY) (NYSE:LYG) and assessing whether its operations in these regions are likely to underpin solid earnings growth.
Bank stepping up withdrawal from foreign territories
Lloyds announced at the end of April that pre-tax profit leapt to 2 billion pounds in the initial three months of 2013, up substantially from a profit of 280 million pounds in the same period last year. Total underlying income rose 3% to 2.4 billion pounds, helped by the sale of its 20% stake in St James's Place for 394 million pounds in March.
The results were principally driven by a 40% decline in impairment charges, to just more than 1 billion pounds, and the bank expects further "substantial" reductions moving forwards. The group also saw costs cut by 6% to 2.4 billion pounds, with further heavy cost-cutting in coming years ready to bolster the balance sheet further.
The majority of Lloyds' retail operations are conducted in the U.K. through flagship brands including Lloyds TSB, Halifax and Cheltenham & Gloucester, and approximately one in three British people do business with the bank. The firm also carries out activities in far-flung regions, although it is in the process of scaling back its operations abroad to concentrate on its domestic marketplace.
Lloyds has historically had a wealth of operations spanning the globe, including the lucrative high-growth regions of South America, Asia, and the Middle East. But the company is rapidly withdrawing from these regions in a bid to scale back non-core operations and strengthen the balance sheet.
The company has reduced its foreign exposure by a third over the past two years, reflecting a 77% decline in total underlying income from its International division to 73 million pounds. Indeed, it announced or completed withdrawal from 12 overseas countries last year, and plans to pull out of a further four territories in the current year.
So is Lloyds Banking Group a buy?
Forecasters expect earnings per share (EPS) to bounce back into positive territory in 2013, after Lloyds slashed losses in 2012 to 2 pence per share from 4.1 pence per share previously. EPS is expected to come in at 4.3 pence this year before leaping 28% in 2014 to 5.5 pence.
The company has said that it wants to return cash to stakeholders at the earliest opportunity, even though a sickly balance sheet has prevented the company from doling out dividends, and analysts expect this to occur sooner rather than later. Projected dividends of 0.2 pence per share and 1 pence per share for this year and next carry meager yields of 0.3% and 2%, although this is a step in the right direction.
The bank currently trades on a P/E readout of 12.6 for this year, above a forward earnings multiple of 11.5 for the entire banking sector, but which collapses to 9.8 in the following 12-month period.
In my opinion, Lloyds' earnings turnaround is actually likely to be bolstered by its reconcentration on domestic operations and withdrawal from overseas markets, at least over the medium term. The firm is a reliable play in the U.K. retail sector and this makes it worthy of investment consideration, in my opinion.
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