Slowing U.K. Growth for Lloyds

We are maintaining our Hold on Lloyds TSB Group plc - ADR (or Lloyds), (LYG - Analyst Report). In its first quarter trading update, Lloyds noted that underlying performance of the business remains strong, with revenue growth ahead of cost growth and productivity and efficiency improving. Asset quality and capital ratios remain solid.

However, our chief concerns about Lloyds rest on slowing growth in the U.K. and its attendant impact on the economy, particularly the consumer and housing markets. Moreover, the company continues to face net interest margin (NIM) pressure, particularly in the retail business where competitive pressures are fierce.

We believe Lloyds’ results should continue to reflect asset growth in the mid-to-high single digits, stabilizing net interest margins, and strong cost controls, partly offset by increased impairment charges from the continuing impact of the turmoil in the U.S. subprime and other credit markets.

At its current price, Lloyds trades at 7.1X the 2008 consensus estimate and 6.5X the 2009 consensus estimate. While Lloyds estimated growth rate over the next few years at 6% is only about one-half that of the industry, the company has a generous dividend, providing a 10.4% yield, more than double the 4.1% for the industry. Our $28 price target implies a forward P/E of about 6 ¾X based on our 2009 diluted EPADS estimate of $4.15.

Read the full analyst report on LYG