Banking giant Lloyds released disappointing annual results, and its share price has taken a battering. What has upset investors, and how will the stock perform in the coming months?
The share price of Lloyds Banking Group [LLOY] has had a difficult run, dropping from 55.99p on opening last Thursday – when it announced its 2019 results – to 50.20p on 28 February’s market close.
This is the latest swing for the share price, which had previously risen 35% from September to mid-December, where it reached around 67p.
That share price climb was down to hopes of a Brexit resolution and a bounce from Boris Johnson’s election win.
Since then, concerns over a potential no-deal Brexit have grown following the new Government’s hard-line approach towards EU trade negotiations – an outcome that is likely to impact domestically-focused Lloyds (and its ailing share price), harder than its banking sector peers.
Meanwhile, Lloyds’s recent full-year results failed to bring much-needed cheer with a 26% drop in pre-tax profits to £3bn, badly affected by £2.45bn-worth of PPI charges. Net income fell 4% to £17.1bn. Lending was also down, but the bank did note growth in certain areas of borrowing, such as SME and motor finance.
The group stated that it was facing the future with confidence sensing some signs of an improving UK economic outlook, consumer and business confidence and a “clearer sense of direction”.
What does the future hold for Lloyds?
There are still reasons to be positive about the Lloyds share price, given the improvement in the UK mortgage market and, according to surveys, an increase in both house buyer confidence and prices.
Lloyds’s performance in this crucial area will be boosted by its purchase of Tesco Bank’s prime UK residential mortgage portfolio. This not only increases its business, but removes a rival in this competitive marketplace.
The recent rise in inflation in the UK has also, it appears, quietened talk of a Bank of England interest rate cut, while August’s deadline for PPI claims means Lloyds won’t need to continue paying such costly bills.
“Lloyds appears to be nursing a bigger hangover from the PPI scandal than its rivals. At least there were no extra provisions in the final three months of 2019 and while the news of a drop in profit might cause a few headaches for shareholders, there are some elements of its numbers which can help ease the pain,” said Russ Mould, investment director at AJ Bell. “Concerns about the balance sheet, which had been mounting in recent weeks, appear to have been allayed for now and the bank has committed to capital generation targets which should underpin the dividend and may even allow the resumption of share buybacks suspended last year. The conversation could also soon turn to interest rate hikes which would be good for the banking sector’s earnings.
“Lloyds appears to be nursing a bigger hangover from the PPI scandal than its rivals. At least there were no extra provisions in the final three months of 2019 and while the news of a drop in profit might cause a few headaches for shareholders, there are some elements of its numbers which can help ease the pain” - Russ Mould, investment director at AJ Bell
Lloyds share price: “a big gainer”?
According to Market Screener analysts have a mean consensus of outperform on Lloyds shares, and an average share price target of 63.62p.
Manika Premsingh, writing in the Motley Fool, believes Lloyds “might be a big gainer” if the UK economy turns around. On this basis, she says, it might be a good time to buy the share price while its valuation is depressed.
Librarian Capital analysts expect future Lloyds earnings to be “flat or slightly-falling”. It likes that Lloyds’ total dividend came in at 3.37p in 2019, giving a 6.1% dividend yield and average annual yield which is likely to be near 10% in the medium-term.
|PE ratio (TTM)||14.40|
|Quarterly Revenue Growth (YoY)||5.90%|
Lloyds share price vitals, Yahoo Finance, 04 March 2020
Hargreaves Lansdown, however, is more cautious. “Lloyds has emerged from the crisis in pretty good shape,” said analyst Nicholas Hyett. “Unfortunately, the final quarter of 2019 suggests things could be tougher going forwards. Business customers are looking less confident, residual values of cars the group finances have declined and bad loans ticked up. None of these are flashing red lights, but they shouldn't be ignored either. Meanwhile, consistently low-interest rates and increasing competition in the mortgage market means new loans are less profitable than old ones.”
Hyett points to Lloyds “potentially lucrative” and growing Wealth and Retirement business in partnership with Schroders as a plus, but adds that “it will take time to get up and running”.
“If current trends continue we think it will be increasingly difficult for Lloyds to grind out growth. Worse, if conditions deteriorate significantly, this quarter's numbers suggest to us that Lloyds could really struggle,” Hyett says. “We think the future for Lloyds looks more stable than sparkling.”
“If current trends continue we think it will be increasingly difficult for Lloyds to grind out growth. Worse, if conditions deteriorate significantly, this quarter's numbers suggest to us that Lloyds could really struggle We think the future for Lloyds looks more stable than sparkling” - analyst Nicholas Hyett