The shares look to be a long-term bargain.
I'm going to stick my neck firmly on the chopping block and say that Lloyds Banking Group (LSE: LLOY) shares are worth roughly twice their current level.
Why? Well, on a combination of its balance sheet, rising earnings, re-introduced dividend and less fearful times.
The question is when, if ever, they'll reach that level, which for the record would be 75p at the time of writing. And if and when they do, what will people like me be saying they're worth at that point -- £1.50!?
Well, probably. Because that's the carrot and stick nature of financial shares. They look cheap for ages, then they get more expensive but actually look cheaper still on forward earnings.
So here's what you have to do: Buy today, wait 'til they double, sell half and let the rest do what they will. Simples!
Hurdles to be jumped
Unfortunately, there are one or two small hurdles that the black horse must negotiate first -- like sovereign debt defaults.
Lloyds could hardly have picked a worse day to announce its half-year results. The Centre for Economics and Business Research said yesterday that Italy is likely to default, but Spain may just avoid it. And what about Ireland, which is already doing its bit to punish Lloyds shareholders?
The weak UK economy and higher funding costs combined to hit Lloyds' margins. The bank reported a whopping headline loss for the first half, mainly due to a £3.2bn to cover payment protection insurance mis-selling.
The Irish debt crisis also saw Lloyd's international unit report a £2.1bn loss due to the risks of its Irish debt not being paid back. And net interest margins fell as the bank had to pay more for wholesale funding and to attract retail deposits.
On the upside, underlying pre-tax profit increased 36% to £1.34bn. And the CEO, Antonio Horta-Osorio, who took up his job in March, is broadly optimistic.
Apparently, the bank is "well positioned to realise the group's full potential over time, and to achieve strong, stable and sustainable returns for shareholders."
The boss called the overall performance "resilient," and said he's sticking to guidance given in June on this year's interest margins and revenue despite problems in the UK economy.
But we aren't seeing any returns for the foreseeable. On the touchy subject of reinstatement of the dividend, we're told it will be "as soon as the financial position of the Group and market conditions permit".
Meanwhile, Lloyds' core tier 1 ratio (which provides protection against unexpected losses) stood at 10.1% (the higher it is, the safer the bank is deemed to be).
The brokers see consensus earnings per share of 5.2p in 2012. But the forecasts vary between 3p and 10p. And they do see the bank restarting dividend payments next year, with an average forecast of a 1.23p dividend.
Discerning Lloyds' long-term future value, though, isn't about its current performance, or even next year's. It's where they'll be five years from now that's interesting.
At the time of writing, the shares are down. What seems to have the market spooked is concern over sovereign debt exposure. But this is nothing new, and was already reflected in the share price for me.
The bank tells us "half of the overall positions of £6.4bn relate to structures where there are underlying assets securing the obligations". It also has minimal exposure to the sovereign risk of Belgium, Greece, Ireland, Italy, Portugal and Spain.
As Lloyds sells off its branches and slims down generally, it should become a leaner, fitter beast altogether. It says it is on track to create this future, with costs slightly down. It has received a number of approaches for the 632 branches it plans to sell and hopes to have a buyer by the end of the year.
It would be no great surprise to me to see a smaller Lloyds bringing in EPS of 15-20p or so a few years' hence and paying a third of that in dividends. If that happens, the shares will have much more than doubled, but they'll look cheaper than they do today.
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> David owns shares in Lloyds Banking Group.