Updates

Will Lloyds’ share price ‘outperfom’ as UK banks scrap for mortgage sales?

Lloyds Bank [LLOY] is in fierce competition for the UK’s dwindling number of home buyers, and the bank's share price has suffered, down over 10% since this time two months ago. The latest figures from HMRC show house sales dipped 6.4% in May, and 11.3% annually. With fewer people selling their homes and a lack of buyers, banks have kept their mortgage rates low to lure prospective purchasers.Lloyds' 1-year share price performance, CMC Markets, 25 June 2019

 

The environment of low mortgage rates is partly due to the Bank of England’s wholesale interest rates being at historic lows. This has led to lower swap rates and a fall in interest rates charged to UK bank customers. 

With the cost of borrowing falling, banks simply cannot make as much money from mortgage rates. This has squeezed margins, with UK banks fearful of raising costs should they concede ground to rivals.

Any further tightening on mortgage rates would put the pressure on Lloyds more than its competitors. Mortgages make up around 65% of its business, the highest of the big UK banks.

Mark Harris of SPF Private Clients summarises in the Telegraph:

“With supply outstripping demand, this is keeping a lid on any mortgage rate increases as lenders compete with each other to attract business."

However, analysts at RBC think competitors will converge with Lloyds’ mortgage rates, leading to more stable margins. So while there’s limited potential to bump up rates and, in turn, profits, Lloyds’ dominant position in the market should be safe.

“With supply outstripping demand, this is keeping a lid on any mortgage rate increases as lenders compete with each other to attract business.” - Mark Harris of SPF Private Clients

Yet, mortgage rates represent one side of the problem for Lloyds. On the other hand, Lloyds could see a drop in annual income as its 'structural hedges' pull in less money.

Lloyds earned £3.3 billion last year through this type of hedging. But as the yield curve on these investments have flattened, so have the returns. Now analysts at HSBC forecast returns from these hedges to drop 35% in the next two years. And, according to the analysts, if Lloyds doesn't reinvest the money, the impact is even worse:

“If the hedge is not reinvested, a likely outcome for Lloyds at current rates, we estimate the net contribution could fall by almost 50%,” HSBC analysts said in their report.

 

How have these concerns hit the share price?

Year-to-date, the share price has climbed 12%, outpacing rivals Barclays and RBS, who are down 2.29% and 0.6% respectively. Yet, since its 2019 peak of 66.57p on 17 April Lloyds’ stock has been on a downward trend, having shed 10% during that time.

Not helping things has been a subdued housing market and regulator pressure to lower overdraft fees. In 2018, the bank’s earnings growth rate dropped from 52% in 2017 to 25%. But the worst could be over, with earnings growth forecast to come in at 38% for 2019.

 

Market cap£40.11bn
PE ratio (TTM)10.32
EPS (TTM)5.50
Return on equity (TTM)9.00%

Lloyds share price vitals, Yahoo finance, 25 June 2019

 

Lloyds P/E ratio of 10.33 suggests decent value, underlined by the stock’s price to book ratio, Reuters rating Lloyds’ shares at 1.00, compared to 2.80 and 2.68 industry and sector averages respectively.

For investors seeking a steady income, there’s a 5.42% forward dividend yield to be had, edging out Barclays’ 4.92% yield and RBS's 3.15%.

 

What the analysts think

HSBC trimmed their price target for Lloyds to 58p from 59p, but maintained their "Hold" rating. Barclays also shaved 5p off their price target, lowering it to 80p.

80p

Barclays' price target for Lloyds shares

RBC remain cautious on UK banks given the heightened chances of a 'No Deal' Brexit or a general election this year. In a swath of cuts to their price targets for UK banks, RBC lowered its target for Lloyds from 80p to 75p. Yet, RBC named Lloyds and CYBG PLC as its preferred stocks from the banking sector.

For the time being, it looks like analysts are cautiously optimistic. The consensus rating on Reuters is ‘Outperform’, while the average price target for the bank is 75.77p. This would represent a decent 29% upside on the current share price if hit.

Written by

Free Report

A new frontier: The 12 energy stocks to watch

Get it now

Continue reading for FREE

Get instant access to this article and receive the latest market updates in our newsletter every week

  • 7000+ subscribers
  • Unsubscribe anytime

Related articles