Lloyds Banking Group is continuing to struggle to acquire a positive consensus among investors, as a lagging UK economy and the threat of a no-deal Brexit weigh on the Lloyds share price.
Since the December-to-April rally, when the shares were trading around 66p, the Lloyds share price has seen a prolonged period of sideways movement. Lloyds shares are currently trading at six-month lows, hovering around 56p.
Q1 results did little to boost Lloyds share price
Despite the recent Lloyds share price performance, which has seen shares fall more than 10% since the Q1 earnings report on 2 May, the bank actually had a decent first quarter.
Lloyds’ statutory pre-tax profits rose for Q1 to £1.6bn, slightly below expectations of £1.88bn, but still well above the levels seen in Q4 and in line with Q1 2018.
However, many analysts seem to remain unconvinced that the bank has improved its fortunes for the better. Several have slashed earnings forecasts, while others have downgraded the bank’s ratings.
A domestically-focused bank, and one of the largest providers of mortgages in the UK, Lloyds’ operations are seen as tied to that of the wider UK economy and housing market. Combined with the threat of a no-deal Brexit, it’s these concerns that could be weighing on sentiment and the Lloyds share price.
No-deal Brexit fears drag on Lloyds’ performance
Underlying fears that the UK will leave the EU in October have been having an impact on the wider UK banking sector and economy. The threat of a no-deal Brexit has also increased somewhat in recent days, after Boris Johnson became the next UK prime minister. With its large exposure to the UK economy, a no-deal scenario could hit the bank, and the Lloyds share price, hard.
If the UK does leave the EU without a deal, analysts expect that consumer spending will be hampered, loan rates will fall, and there are likely to be higher impairment charges from non-performing loans, as repayments become harder for both businesses and individuals. A large provider of UK mortgages, Lloyds could also be impacted by a downturn in the housing market.
However, some analysts have a slightly more positive view, arguing that most Brexit worries have already been priced into the markets.
Weakening consumer credit growth also suggests a more troublesome future for the UK banking sector. Following a Bank of England interest rate rise to 0.75% last summer, the increased possibility of a no-deal Brexit has now prompted talks of an interest rate cut. Higher interest rates are better for banks in general, so a cut could further hurt Lloyds, and the wider sector.
Nonetheless, the bank does still have some positive numbers behind it. The Lloyds share price has gained around 12% year-to-date, and the bank’s dividend yield is currently at 5.7%. Earnings per share are at 5.5p, beating the FTSE 100 average, which is one of the key appeals of the Lloyds stock.
What to expect from Lloyds’ H1 results
Lloyds’ Q2 outlook might be a difficult one, given the weaker economic performance for the UK across April and May. Lloyds is expected to announce pre-tax profits of £4.3 billion, which would be up from £3.1 billion a year earlier. Revenue is expected to rise to £9.4 billion, while weaker interest rate expectations could see a downward pressure on net interest margin, which was at 2.91% at the end of Q1.
Further PPI provisions, for which the bank set aside £100m earlier this year, might be worth bearing in mind. Some will be looking forward to the bank reaching the end of its PPI payouts this year, as it will free the bank from the ongoing cash burn.
Following the half-year results, investors will be keeping a close eye on the UK economic performance and general Brexit proceedings for any impact they may have on the Lloyds share price. Lloyds releases its H1 results at 7am on Wednesday 31 July.
Read our Lloyds share price half-year results round-up.