Most investors would recoil at the suggestion of Lloyds Banking Group (LLOY) as a stock pick, but Simon Callow, manager of the CF Midas Balanced Growth Fund at MAM, tells us why it will be one of his core holdings by Christmas.
This is a plain-vanilla bank going back to basics, according to Mr Callow. With a balance sheet cleaner than other balance sheets, which he says can be treacherous to wade through, he believes the transformation of Lloyds as an investment has already been kick-started. He says the group is well-placed to benefit from a stabilising UK economy and housing market and reduced tail risk within the financial system.
And he's adamant the man behind Lloyds's recent revolution is António Horta-Osório, its 48-year-old chief executive who joined the board in January 2011. For starters, he's hacked off the 'frills' on its non-core business, slashing it right down from £121bn to £85bn.
Mr Callow says: "Lloyds' public battle with Payment Protection Insurance (PPI) claims is now under control as costs have plateaued. At the end of the fourth quarter of this year, it will finally be able to announce payouts have peaked - meaning the worst is over.
"People also still think Lloyds is drowning in non-performing property loans, but in fact these are also a declining trend."
As a result, its profitability is on an upward journey and its interest margins have risen for the second time since 2010, currently sitting at 1.9 per cent. And the prediction for its net income in 2013 is extremely impressive, with analysts anticipating an 80 per cent rise over the course of the new year.
The combination of these strengths - which he says are still unrealised by the vast majority of investors - means it has a price-to-book ratio of 0.6, which is cheap enough for him to sit up and take note. "The new trends emerging from Lloyds have not been priced in yet, so if you want a bargain, get in now while it's cheap," he says.
Mr Callow is hoping the share price (currently 45p) will dip over coming weeks, at which point he plans to bolster his 1.1 per cent allocation to 2 per cent before Christmas - the most he would invest in any single stock.
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