Thursday saw the Bank of England slash interest rates for the second time in a month. At 0.1% they now stand at their lowest level in the bank's 300 year history. At the same time the BoE upped its quantitative easing program by £200 billion. Investors in Lloyds’ [LLOY] share price will naturally be watching the central bank’s every move at what is a torrid time for global equities.
Announcing the measures, the BoE said:
"The spread of Covid-19 and the measures being taken to contain the virus will result in an economic shock that could be sharp and large, but should be temporary."
“The spread of Covid-19 and the measures being taken to contain the virus will result in an economic shock that could be sharp and large, but should be temporary” - the Bank of England
Both measures should help the bank keep lending - and hopefully reassure shareholders. As the UK's biggest lender, Lloyd’s share price spiked on the news, even if it did finish the week almost 10% down.
If the economic effect really is temporary, as the bank suggests, is now time to buy Lloyds’ share price?
How has coronavirus affected Lloyds’ share price?
Lloyds’ status as a bellwether for the economy means its share price is directly linked to the coronavirus outbreak.
With pubs, restaurants and other businesses forced to close, the economic outlook for the UK is not great, to put it mildly. People aren't spending, businesses can't pay their staff and banks are being looked upon to lend. The impact is cyclical, the more people out of jobs, the more pressure on businesses.
In the budget last week, the government was forecasting a meagre growth rate of 1.1% for 2020 - and that doesn't take into account the economic effects of the coronavirus. Lloyds is feeling this with traders selling shares in the bank. And with a recession looking more and more likely every day, Lloyds’ share price could sink further.
What roles does Lloyds play in the economic recovery?
Lloyds, as UK Investor Magazine points out, is a large "facilitator of economic activity" in the UK.
The government has outlined a huge package of financial stimuli designed to keep the economy going. Tellingly Boris Johnson said that it will support workers through the crisis as well as banks. A marked contrast from the 2008 financial crisis where only the banks received support.
"The role of the Bank of England is to help to meet the needs of UK businesses and households in dealing with the associated economic disruption," the Bank of England said announcing the measures.
“The role of the Bank of England is to help to meet the needs of UK businesses and households in dealing with the associated economic disruption” - the Bank of England
Under the Coronavirus Business Interruption Scheme the government will underwrite risky loans. Lloyds, like other banks, will be able to offer payment holidays from loans and mortgages. This will also take pressure off the prospect of mounting bad loans as customers struggle to pay back borrowing.
Yet the bank could fail to keep up with demand from affected customers. The government is announcing new measures on an almost daily basis - sometimes taking workers by surprise.
Reuters reports that help centre staff at rivals Barclays were caught unawares by the emergency measures.
Lloyds, or at least Lloyds-owned Halifax seems to be keeping up better than others with Lloyds reporting that the building society has been the most responsive according to an unnamed source.
|PE ratio (TTM)||9.59|
|Quarterly Revenue Growth (YoY)||5.90%|
Lloyds share price vitals, Yahoo Finance, 24 March 2020
What's the long-term outlook for Lloyds?
In any panic, negative news tends to create an overreaction among sellers. Over time, losses should average out. The question is how long it takes for the UK economy - and Lloyds’ share price - to bounce back.
Other pressing concerns for Lloyds are the health of the UK economy and Brexit. There is still no agreement on the UK's relationship with the EU for when it leaves the union. The coronavirus outbreak will only make negotiations harder.
Certainly the bank can expect a couple of quarters of dented earnings. But with a 10.41% forward dividend yield and the current share price, Lloyds could be a long-term investment worth making. That is, if the economy picks up. On this Art Hogan, Chief Market Strategist at National Securities told CNBC:
“We know you have to hurt the economy to stop the virus. But the damage is probably going to be temporary, and we’re going to see a recovery probably in the back half of this year.”
“We know you have to hurt the economy to stop the virus. But the damage is probably going to be temporary, and we’re going to see a recovery probably in the back half of this year” - Art Hogan, Chief Market Strategist at National Securities