Can the Lloyds share price conundrum be reconciled?

January has brought little cheer for Lloyds Banking Group [LLOY] on a number of fronts, not least the company’s share price which is down 11% year-to-date.

The group has been obliged to write off additional debts relating to customer mistreatment that is expected to total tens of millions of pounds, and higher than expected payment protection insurance (PPI) claims led to a warning that staff bonuses would be cut for the first time in four years.

Thus far these big developments have not yielded a higher share price – Lloyds closed at 56.79p on 31 January, 16% off a six month high hit in December.

However, not all analysts are writing the share price off. Furthermore, as the UK exits the EU this week, the banking group may find its fortunes reversing as the potential for more certainty over UK trade approach could bolster its fortunes.

What the analysts are saying

Despite predictions of more dividend growth at Lloyds creating a 6% yield this year, Royston Wild writing in the Motley Fool suggests that investors look elsewhere, pointing to falling revenues and Bank of England data indicating that lenders are continuing to reduce corporate lending. The UK’s central bank has also predicted that credit supply to business will contract again in the three months to February 2020.

But this view is not shared by all. Stock Market Wire notes that Morgan Stanley reiterated its ‘overweight’ rating on Lloyds. Furthermore, among 22 analysts polled, the average recommendation was also overweight, according to MarketWatch. Only two had a sell rating while seven recommended a hold and 10 recommended it as a buy.

A research note issued to investors by analysts at Barclays reaffirmed an overweight rating, although both Citigroup and JP Morgan have reiterated neutral ratings.

Lloyds share price vitals, Yahoo Finance, 03 February 2020

Brexit pessimism or opportunity?

Earlier in the month, Alan Oscroft, also writing in the Motley Fool, observed that Lloyds’ share price had a prospective P/E multiple of just over eight and that the bank has progressed well since the 2008 financial crisis, with a much healthier balance sheet and the ability to pass the Bank of England’s stress tests with relative ease.

Despite concerns over dividend cover, he described Lloyds as a buy at these valuations, as long as the UK is able to negotiate a trade deal with the EU. However, most Brexit pessimism has already been built into the Lloyds share price and a P/E of eight is too low for a post-EU trade deal situation, according to Oscroft.

Richard Hunter, head of markets at Interactive Investor, says that market watchers should not be misled by the increase in Lloyds’ share price value since the UK general election in December 2019, given that its stock has fallen 16% over the last five years.

He suggests that despite the issues with PPI compensation and the historically low-interest rate environment in the UK, Lloyds still offers a sector-leading cost-income ratio of approximately 47% and a dividend yield near 5.2%.

Hunter reckons these factors – combined with the fact that the group has streamlined its business and established a strong digital presence – make it an interesting proposition.