Lloyds’ [LLOY] share price is likely to move following the publication of half-year results, due out this week. The report will give shareholders the clearest insight yet into how the bank is faring under the coronavirus.
While it's likely that the bank's profits will come under strain, any signs of resilience could boost Lloyds’ share price. With a shake-up in strategy imminent, now could be the time to back the UK's biggest bank.
For bargain hunters, Lloyds’ share price could be one to watch. Down 54.14% so far this year, early summer saw a potential rally snuffed out, and the share price has been oscillating between 28p and 35p since.
Will Lloyds’ half-year results see a break out? Or are shareholders in for more losses?
When do Lloyds report half-year results?
How could results impact Lloyds’ share price?
Price hike from UBS and Morgan Stanley
Analysts at some major banks are now backing Lloyds’ share price. Last month, both UBS and Morgan Stanley bumped their price target on the stock to 45p. Hitting this would represent a 54% upside on Lloyds’ share price through 28 July’s close.
Joining them is Credit Suisse. Recently, analyst Jon Peace at the Swiss-based bank upped his recommendation from neutral to outperform, pinning a 40p price target on the stock. This would see a decent 36.89% upside on the current share price (as of 28 July’s close).
What could move Lloyds’ share price post-earnings?
Pressure on margin rates
The coronavirus has undoubtedly seen Lloyds’ business take a massive hit. Mounting unemployment could see people struggle to pay back loans while Bank of England interest rate cuts are weighing on profitability.
Lloyds makes a chunk of its income from net interest margins, making this the first metric to watch out for. However, the banking sector as a whole might be too optimistic about how much they can earn from net interest according to Deutsche analyst Robert Noble: “We believe UK bank revenue consensus is overly optimistic given the interest rate environment.”
Noble cut Deutsche's forecasts for net interest income to 5%, below the City consensus for 2021, and 7% in 2022.
“We believe UK bank revenue consensus is overly optimistic given the interest rate environment” - Deutsche analyst Robert Noble
The next related metric to watch is impairment charges. In first quarter results, Lloyds set aside £1.43bn to offset any spike in bad loans caused by the coronavirus. With predictions the economic fallout from the outbreak will get worse before it gets better, Lloyds could find itself having to dig deeper to cover losses, particularly with unemployment set to rise.
Noble thinks UK unemployment will hit 7%, leading to impairments of £40bn — worse than the banking sector's current expectations. If unemployment hits 10%, impairments could hit £59bn across the industry.
In first-quarter results, Lloyds analysts provided a number of scenarios for how the UK economy could perform over the next few years. These included forecasts on GDP and impairment charges. Any deterioration in these metrics could spell trouble for Lloyds’ share price.
Cost of impairment charges if UK unemployment hits 7%
So, time to buy Lloyds?
For those considering buying Lloyds, there are a number of factors to take into account. While Lloyds’ share price might look like a bargain, the UK economy isn't out of the woods yet. The bank’s own high exposure to UK retail banking has left it suppressed for some time.
It was also hit with a £64m fine last month because of the way in which it handled customers who had fallen behind on mortgage payments. This shows that Lloyds is still vulnerable to financial own goals. The hefty fine will hurt profits in a similar way to the PPI fiasco that dogged Lloyds last year.
That said, a strategy shakeup and diversification into wealth management could see Lloyds become more resilient to events outside its control. Any inkling that this is the case in half-year results could give shareholders cause for hope, and boost Lloyds’ share price over the mid-term.
|PE ratio (TTM)||12.56|
|Quarterly Revenue Growth (YoY)||-35.1%|
Lloyds share price vitals, Yahoo Finance, 29 July 2020