In November, Lloyds’ [LLOY] share price gained 6.7%. Powering this ascent has been the confidence that the UK could leave the EU with a deal.
But are Brexit fears obscuring what is a decent bet for both income-seeking and growth investors?
Why should traders care?
One reason for confidence is the bank's size. It's one of the largest in Europe with a market cap of £42.8 billion. And in the UK banking sector, it enjoys an average market share of around 19% for its main products.
Weak third-quarter earnings will give pause for concern. Yet, traders should note that PPI charges wiped out Lloyds’ profits. With the deadline for claims now passed, this is unlikely to hold back earnings.
The upcoming UK general election could deliver more certainty on Brexit. If the Tories win, then they will try to get their deal through parliament. If Labour win, then a remain vote may be on the table. In either case, consumer confidence could return to the economy. As a result, Lloyds’ credit and mortgage businesses could benefit.
To grow, Lloyds has partnered with Schroders [SDR] to offer a wealth service. Aspirations are to create a market-leading financial planning service in 3 years. This will help Lloyds’ retirement businesses. A forward-thinking move considering the UK's ageing population.
How has Lloyds streamlined business?
Since the financial crisis, Lloyds has invested in streamlining its business. This has involved de-risking its balance sheet and simplifying processes.
The next phase of this is heavy investment in digital technology. Between 2018 and 2020, the bank is to invest £3 billion in digital transformation.
As Lloyds nears the halfway mark of this initiative, is it money well spent? Virtual assistants now manage up to 5,000 conversations every day. Customer satisfaction is up and 25% of online queries are never passed to a human.
Lloyds is now the largest digital bank in the UK. According to CEO António Horta-Osório, there are 16 million active digital users and 10 million on the app.
Number of Lloyds' active digital users
How profitable is Lloyds?
Digital is one way that Lloyds is reducing its cost base. The plan is to reduce it to £8 billion by 2020. In the face of economic uncertainty, this should help protect profits.
Lloyds is targeting a return on tangible equity of between 14% and 15%. The bank has achieved profitability levels above equity costs every year since 2015. It has also achieved higher profits in the same time frame. Net interest margin came in at 2.93% last year, compared to 2.86% the previous year.
|PE ratio (TTM)||21.10|
|Operating Margin (TTM)||33.39%|
Lloyds share price vitals, Yahoo Finance, 3 December 2019
Is Lloyds a good bet?
Still, the stock is down over 20% from where it was 5 years ago. But in that time the stock's earning per share has gained 110%. This suggests that despite the share price woes, it is a stock that pays an income.
Between 2017 and 2018, Lloyds’ dividend grew 5.23% while earnings per share shot up 26.64%. Analysts tracking Lloyds on FT.com expect a dividend of 0.03p for 2019 - a 5.92% gain on the previous year. A 63p average price target would see a 6.4% gain on the current share price.
Amount Lloyds' share price is down from 5 years ago
In October, Citigroup [C] downgraded Lloyds from Buy to Neutral. Analysts at the bank said earnings risks meant the share price was “less attractive”.
Yet, if the general election sees more certainty over the UK’s future with the EU, Lloyds could be a good bet.
More on the UK election
Lloyds is a bellwether for the UK economy. Since the EU referendum, its share price has moved with events in Westminster and Brussels.
But what will happen to FTSE 100 stocks if the December 12 election delivers more certainty? And what will happen if it doesn't?