Despite Lloyds’ [LLOY] share price showing signs of a recovery in October, it is still down 55.5% so far in 2020. As of 27 October, Lloyds’ share price has climbed 6.78% since the start of the month. As it prepares to release its third-quarter earnings results on 29 October, what should investors expect from Lloyds’ share price?
The financial services firm, which is most vulnerable to the convulsions of the UK economy, has been battered by fears over Brexit, the coronavirus pandemic and record low-interest rates.
As a result, Lloyds’ share price has had a tough year. The stock opened the year at 63.75p but dropped to 26.13p on 1 April as pandemic woes rocked the market. Since then, Lloyds’ share price has continued on a downward trend as jitters over bad loans and negative interest rates grew. The stock hit a 52-week low of 23.58p on 22 September.
However, since the start October Lloyds’ share price has improved considerably. The stock jumped to a high of 29.70p on 23 October, boosted by a robust UK housing market.
A challenging outlook
For the second quarter, Lloyds reported a loss of £676m down from a £1.29bn profit in the same period last year. The UK bank also put aside £2.4bn for bad debts, as CEO António Horta-Osório warned of a more challenging outlook.
Lloyds' Q2 loss - a drop from £1.29bn profit in 2019
Looking ahead to the firm’s third-quarter results, Lloyds is expected to post a 90.9% year-over-year drop in earnings, according to Refinitiv and CNBC. Despite a recovery in the UK housing sector, a key market for the bank, analysts stuck to the downbeat forecast.
Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, also notes that bad loan provisions have been increasing amid the “sharp economic contraction”. With the recovery running out of steam, she expects more capital will have to be set aside to cover defaults.
“At the same time, loan profitability has taken a hit given the lower interest rates, which have also made attracting more savers to bank their cash very difficult. These are trends which seem unlikely to disappear any time soon given the current resurgence of coronavirus cases, and the further economic damage which ongoing regional lockdowns are likely to cause,” Streeter said.
“At the same time, loan profitability has taken a hit given the lower interest rates, which have also made attracting more savers to bank their cash very difficult. These are trends which seem unlikely to disappear any time soon given the current resurgence of coronavirus cases, and the further economic damage which ongoing regional lockdowns are likely to cause” - Susannah Streeter, senior analyst at Hargreaves Lansdown
Streeter did highlight the group’s strong digital services — Lloyds has one of the lowest cost to income ratios in the industry — as well as its growing wealth and insurance businesses as positives, which she thought gave the bank “a competitive edge in bad times”.
Lloyds’ share price rated a Buy ahead of Q3 earnings
Lloyds’ share price has a consensus Outperform rating among 24 analysts polled by MarketScreener and an average target price of 36.82p.
Jon Peace, head of European banks research at Credit Suisse, also maintained a Buy rating on the stock on 21 October, with a target price of 40p. He expects the UK bank’s third-quarter results to show improvement in impairments, capital and margins such as mortgage pricing and unsecured consumer balances.
“However, the rate outlook remains a medium headwind … and Brexit still presents asymmetric risks to the downside,” Peace said, pointing to the prospect of negative UK rates dampening investor uptake.
“However, the rate outlook remains a medium headwind … and Brexit still presents asymmetric risks to the downside” - Jon Peace, head of European banks research at Credit Suisse
Although Credit Suisse does not favour UK banks in a “pan-European context” Peace did say Lloyds was the top domestic pick due to lower impairments and superior ROTE.
Meanwhile, JPMorgan analysts reaffirmed a Neutral rating on Lloyds’ share price at the end of September with a 37p target. Indeed, Lloyds’ share price could resume a downward spiral as the UK economy endures a long COVID-19 hangover.
A hard Brexit could also produce a “significant blow to UK-focussed cyclical shares like Lloyds”, Royston Wild wrote in the Motley Fool.
Citigroup analysts, meanwhile, see “limited incremental downside risk” from a no-deal Brexit versus a rudimentary free trade agreement with the EU for UK banks.
They also predict “sizeable” dividends will resume from next February. “We expect domestic banks to also beat on impairments, most notably Lloyds,” the firm said, according to Proactive Investors.