2018 was a brutal year for Lloyds Banking Group [LLOY] with the share price falling over 22% as Brexit fears dented investor confidence.
While the decision to leave the EU has affected the UK’s other big banks, Lloyds domestic focus has left it exposed. Over 97% of the bank’s business comes from the UK and a Brexit-triggered squeeze on consumer spending or home buying could be damaging. Compare this to HSBC, which last year experienced a 14% fall in share price as its internationally-focused business – which sees 75% of profits come from Asia – provided insulation from political woes at home.
Lloyds share price performance, London Stock Exchange interactive chart, as at 7 January 2019
How Lloyds ended 2018
Shares in Lloyds have fallen a hefty 25% since this time last year and closed Friday’s session at 52.80. December was particularly hard as Theresa May’s last-minute decision to postpone a vote on her proposed Brexit deal, and ensuing speculation over a no-deal, saw the bank’s stock drop to a year low of 50.03. Shareholders will be watching closely to see if the outcome of next week’s rescheduled vote adds to the pressure.
On the other hand, December also saw the bank deliver better-than-expected Q3 earnings results, including pre-tax profits of £1.8bn and revenues of £4.686bn. Lloyds CEO António Horta-Osório credited a “low-risk, customer focused approach” for these strong results and said the bank was on track to meet its financial targets.
|Net income % change, Q3 YoY||+2%|
|PE Ratio (TTM)||9.39|
|EPS Ratio (TTM)||5.70|
Lloyds Banking Group stock vitals, Yahoo finance, as at 7 January 2019
Lloyds exposure to the UK housing market
With a market share of 21.2%, Lloyds is the UK’s biggest mortgage lender and vulnerable to any jump in bad loans caused by a hard or no-deal Brexit.
Worryingly for the bank, Moore Stephens has estimated that the value of residential mortgages written off by UK lenders rose 58% in the year to June. The accounting firm also warned that any rise in interest rates could result in more write-offs. Meanwhile, figures from Nationwide showed a 0.5% growth in the UK housing market for December, the slowest annual rise since February 2013.
Lloyds share of UK mortgage lending market
However, once the terms of the UK leaving the EU are agreed, house prices could stabilise. Mark Readings, managing director of House Network, told the Independent:
“As we move into 2019, with political instability fears around Brexit still playing a huge part in the lack of certainty amongst both buyers and sellers, we expect to see this confidence slowly regained once the government’s plans to leave the EU are finalised.”
Trouble at the top?
December also saw demands for Horta-Osório’s resignation from Conservative MP Kevin Hollinrake over bank fraud at the Reading branch of HBOS. Hollinrake also called for the FCA to investigate the matter.
Yet it’s worth remembering that under Horta-Osório’s watch Lloyds has gone from a £260m loss in 2011 to a £3.5bn profit. Driving this profit has been a strategic focus on delivering an excellent customer experience which has seen account opening times shrink by 40% and a huge investment in digital banking. Despite the short-term outlook being clouded by political events, these initiatives could see longer-term returns for investors.
Is there opportunity in Lloyds share price?
UBS has picked Lloyds as one of its preferred global banking stocks for 2019, setting a target of 80p a share – a level not seen since the summer of 2015. A return to this price would represent a 50% increase based on a 50-day moving average of 53.5. The Swiss investment bank cites increased earnings per share and good dividend payments as reasons for optimism. In the wider banking sector, UBS has forecast global banks will deliver a 12.2% return on equity in 2019, up from 11.9% in 2018.
Global banks' predicted return on equity in 2019, as forecast by UBS
For investors who can stomach the Brexit volatility, Lloyds current share price could represent something of a bargain. Earnings per share grew 5% in Q3 compared to the same time last year, while the bank carries a low P/E ratio of 8.87. Then there’s the impressive dividend yield of 6.3%, which should appeal to those looking for a steady income generating stock.
With less than 12 weeks left until the UK is due to leave the EU, investors will now need to decide whether shares in Lloyds are worth the risk or if there are fresh lows to come.