Lloyds’ [LLOY] share price has surged 15% since 9 October on hopes that the UK will be leaving the EU with a deal. This will come as a relief to shareholders ahead of the company's Q3 earnings results.
As a bellwether for the UK economy, Lloyds' share price is particularly prone to price moves on events that are outside its control, which has seen the stock yo-yo as MPs debate Brexit. It is also the UK’s biggest bank, which means it is more susceptible to the PPI fiasco, slowing mortgage sales and a general malaise in the country's economy.
Even with the bank’s robust cost-saving measures going some way to protect its margins, there is volatility in Lloyds' share price. Last quarter the amount set aside to cover PPI claims took many by surprise. This triggered a sell-off in the share price with losses only just recovered.
Ironically, Lloyds’ Q3 earnings come out 31 October - the day the UK was due to leave the EU. While it will now simply be Halloween 2019, there's still plenty to watch out for in Lloyds’ Q3 earnings.
What to watch out for in Lloyds’ Q3 earnings
A lower risk/reward ratio?
Last week Citigroup [C] downgraded the bank's share price from Buy to Neutral. In their analysis, Citi said that Lloyds’ recent share price bounce actually makes the stock a less attractive risk/reward proposition. In a note, Citi analysts said:
“Previously the lowly valuation compensated investors for earnings risks, as well as the economic & political uncertainty, but post the recent bounce we believe the risk/reward is no longer as attractive.”
Citi points out that Lloyds’ net interest rate margin - a key measure of profitability - has declined 2bps in the past two quarters. For Q3, Citi are expecting a further 3bps drop which will weigh on revenue. Yet the bank's cost-saving programme could offset tightening margins.
Over the longer-term, Citi's earnings forecast for Lloyds' stock is more bearish than the rest of the City at 3% for 2020.
“Previously the lowly valuation compensated investors for earnings risks, as well as the economic & political uncertainty, but post the recent bounce we believe the risk/reward is no longer as attractive” - Citigroup analysts
PPI continues to hurt
During the earnings announcement, Lloyds is guiding for £1.2-1.8 billion in extra PPI charges for the quarter. Obviously, this will weigh on profits. Citi expects PPI costs to come in at the higher end of forecasts, at around £1.55 billion. Anything over the top end of guidance is likely to trigger another drop in Lloyds’ share price.
While the nation tires of Brexit, it continues to be a major factor in the UK economy. Even though the UK has a deal in place with the EU, it is yet to be ratified by parliament. With MPs squabbling over a timetable to debate the bill, there could be movement in the share price irrespective of what happens in the coming weeks. Throw in the threat of a general election and a no-deal Brexit is back on the table.
Expected PPI costs
Is Lloyds’ share price a buy?
Lloyds’ share price slid 3.2% last quarter as PPI concerns weighed on investor sentiment. Prior to that, 2018 full year results saw the stock dip 1.2% on 21 February, before rallying 3.94% a week later.
Among the 25 analysts tracking Lloyds on FT.com, eight have a Buy rating on the stock and seven rate it Outperform. Nine analysts have the stock at Hold, and one lone analyst rates it Underperform. None rate it a Sell. Hitting the consensus 65p price target would represent an 11.6% upside on the current Lloyds’ share price.
For traders looking for exposure to UK banking stocks, Lloyds’ price to earnings multiple of 11.32X is good value compared to its peers. RBS carries a 34.94X and Barclays an eye-watering 77.59X. While for income-seeking investors, the stock has a healthy 5.4 forward dividend yield.
Investors will have to weigh up whether the risk is worth the reward, in what promises to be a volatile final three months to end 2019.
|PE ratio (TTM)||10.85|
|Quarterly Revenue Growth (YoY)||-12.60%|
Lloyds share price vitals, Yahoo Finance, 30 October 2019
Who else is reporting Q3 earnings?
Q3 earnings season enters the home stretch next week with updates from Nio, Square and Disney among others. See who’s worth watching in our full Q3 earnings season preview.