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Lloyds share price defies last-minute PPI surge, but what’s next?

It could have been a terrible past week for Lloyds Banking Group’s [LLOY] share price. Just two weeks earlier, it was readying itself, on the evening of 29 August, to reach the final deadline in which customers could claim for compensation for mis-sold payment protection insurance.

It had put aside extra funds to cover the last-minute push of claims, which would bring the total the bank had paid out to £20bn. The bank thought the nightmare was over. But the surge had been underestimated, and by 9 September, it was revealed that extra payments of up to £1.8bn would be made, bringing its total cost to £22bn.

 

 

What should have been an announcement that sent its share price on a further downward spiral – the bank’s value had fallen 25% from mid-April up to 9 Sept – turned into something entirely different.

After initially dipping in early trading on the news, the bank closed the day marginally up, before going on to close the week a sizeable 8.4% up on the previous week’s close, its strongest performance in months.

 

Why the surge?

The surge resulted in a number of factors: firstly, the bank said it would in part offset the extra PPI cost by halting its share buyback programme, that had been set to cost it £600m in capital this year, on top of the £1.15bn already spent. The dividend remained in place.

“The group now expects capital build in 2019 to be below our ongoing 170 to 200 basis points per annum guidance and for the statutory return on tangible equity to be lower than our 2019 guidance of around 12 per cent, with the final outcome dependent on the actual charge taken,” Lloyds said in a statement.

“In line with its prudent approach, and the uncertainty around the final outcome for PPI, the board has decided to suspend the remainder of the 2019 buyback programme, with £600m of the up to £1.75bn programme expected to be unused at mid-September.”

Secondly, UK stocks – particularly those, like Lloyds, for which the majority of profits are drawn domestically – received a boost as investors become more confident that it is increasingly unlikely that the UK will leave the EU without a deal.

Thirdly, Lloyds benefitted from a wider rally in global stocks as President Trump eased his trade war rhetoric and spoke of new negotiations with China.

 

Market cap £37.541bn
PE ratio (TTM) 10.13
EPS (TTM) 5.30
Quarterly Revenue Growth (YoY) -12.60%

Lloyds share price vitals, Yahoo Finance, 17 September 2019

 

Is the surge sustainable?

If a Brexit deal is struck, Lloyds’ share price will likely pop further due to an outpouring in investor confidence.

Read our full breakdown of this scenario here.

Some analysts are however less confident on Lloyds' ability to keep up the momentum. On 12 September, as part of a wider UK banking review, Goldman Sachs [GS] downgraded Lloyds from “neutral” to “sell”, handing it a 47p price target, representing a 12.9% downside from its current share price.

“We see Lloyds as a well-run bank with management, in our view, pursuing the right strategy... A key question for the group going forward, however, will be how long it can maintain the higher yield of its mortgage book. Ultimately, over the medium-term, we believe that the yield of its mortgage book will fall toward an industry-average level, driving downward revisions to consensus forecasts,” Goldman said in a note.  

Goldman added that the flattening yield curve was also a challenge for Lloyds. “With swap rates having fallen significantly and the yield curve now flat to slightly inverted, this has important ramifications for Lloyds.

“With swap rates having fallen significantly and the yield curve now flat to slightly inverted, this has important ramifications for Lloyds” - Goldman Sachs analysts

 

“First, for the banks in general, as existing hedges from prior years with higher rates mature and are either rolled forward at spot rates or rolled off, the net contribution of the structural hedge to NII will diminish. Secondly, the flat yield curve means that simply increasing the notional or duration of the hedge would no longer result in an uplift of NII, all else equal.” 

More widely, of 22 analysts tracked by CNN, 13 rate Lloyds as ‘buy’ or ‘outperform’, six as ‘hold’ and just three as ‘underperform’ or ‘sell’.

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