Hello. Welcome to Company Focus. My name's Aamer Nawid. I'm a research analyst at Fat Prophet, and today we're going to be taking a look at Lloyds Banking Group. One of the most common questions I'm asked by investors is my take on the banks, and looking at Lloyds in isolation, this situation's anything but clear-cut.

Whilst I think the upcoming UK election won't be make-or-break for the FTSE 100, I think Lloyds' shareholders may want to tune into what each party has in store for the government's 41 per cent stake.

It's clear that government bailouts have played a central role in the deterioration of the UK's public finances, and so it's no surprise to see the Tories talk about spinning backwards the Lloyds shares into the private space as soon as possible. Labour has jumped in to label the idea of possibly offering these shares back to the private sector at a discount a gimmick. So the war goes on, and I'm sure it will continue right up and through 'til May the 6th.

However, when eventually Lloyds is spun back into the private space entirely, there is a potential there for some negative pressure on the share price. However, in the long term, I'm upbeat on the prospects for Lloyds based upon its pre-eminent position in what is a gradual, slowly-but-surely recovering economy.

Lloyds released a trading update during March, and it was positive enough to suggest that a hasty disposal of government shares may not be the best thing.

As you can see from the share price performance so far this year, there's a notable upturn there which coincided with the March announcement. Basically, the bank has announced that the business is heading in the right direction. The number of loans turning sour by corporate retail is declining. Less than was expected. Costs have been reined in, and management expect profitability to come back on the agenda in 2010.

The Group released its full-year results for 2009 during February, and despite impairments coming in at £24bn, versus around about £15bn for 2008, management claimed that the year was one of change as well as achievement. Shareholders may have been slightly puzzled as to what exactly Lloyds achieved during 2009. However, if you look at impairments during the second half of the year, they were 21 per cent lower than they were in the first. And so it seems that there is light emerging at the end of this long sort of bad debt tunnel.

Lloyds is far from out of the woods and risks remain, as you can see from the chart here. The shares have got a lot of catching up to do, and it's unrealistic to expect them to reach the levels of say, early 2008, any time soon. Risks come on numerous different fronts. The bank is now a dominant player in the UK market, but in the UK market, the housing sector remains under pressure, although I believe in an albeit gradual recovery in the UK commonly, this is not guaranteed.

In addition, a recent announcement from credit agency Standard & Poor's also unveiled the fact that Lloyds' nonperforming assets are 9 per cent of its loans, and that's a lot higher when compared with the likes of, say, RBS or Barclays, whose share prices have outperformed Lloyds so far this year.

And then add to the mix the fact that Lloyds has a significant amount of wholesale funding which is due to mature in the next couple of years, it's clear to see that there are several headwinds which the bank will have to deal with.

However, management is dead keen to avoid a repeat of 2008 and 2009, and they've taken steps to ensure this doesn't happen. During those two years the losses amount to around about £30bn. costs have been reined in quite significantly, and also I suppose the cost synergies from the HBOS merger are expected to sort of yield £2bn worth of savings by the end of 2011.

2009, though, did see a steady improvement in the net interest margin, which improved from 1.72 per cent to 1.83 per cent. This is expected to reach 2 per cent in 2010, and improve thereon. Whilst for Lloyds 2009 was a year in which I suppose everyone focused on what was bad about the HBOS deal, potentially 2010 could be the year in which the positive synergies do start to emerge.

Lloyds now controls around about a third of the UK savings and mortgage market, and essentially provides a play on the UK economic recovery.

So where do we stand as far as the UK is concerned? Well, I can see the UK economy gradually recovering. With its strong market position, its effective cost-cutting and its improving strong margins, I see Lloyds going along for the ride also, and its shares are well-poised for a long-term recovery.

Thanks for watching. Make sure you tune in again next week.