Headaches from the past and the present are clouding future hopes for Lloyds [LLOY] share price.
In its recent half-year results, the banks reported a worse than expected 7% fall in profits to £2.9bn. It blamed an extra £550m provision to cover a potential final surge in Payment Protection Insurance claims ahead of the August 29 deadline, as well as an increase in charges for bad loans to £304million in the second quarter.
That’s the highest number since the second quarter of 2014 and raises concerns about the impact of economic uncertainty on both business and consumer borrowers.
Amount profits fell in half-year results to £2.9billion
Indeed, Lloyds stated in its results that business confidence had “softened” with investment and employment intentions declining.
That matters because Lloyds, given its overwhelming UK focus – including a large mortgage business – is seen as a proxy to the state of the economy; one which could be extremely vulnerable to Brexit induced job losses and a housing crash.
Adding to the concerns are growing expectations that any future Bank of England interest rate shift would be downwards, putting further pressure on profitability.
Investors are becoming increasingly wary with Lloyds’ share price falling from 66p in mid-April to under 50p as of 19 August.
But it isn’t the only UK bank to be, as AJ Bell Investment Director Russ Mould describes it, in the “investors’ doghouse”.
Trouble across the board
Aside from the economy and the low-interest rate environment, the sector has been bashed by mismanagement, as witnessed in the travails of Metro Bank [MTRO], as well as growing fintech competition.
CYBG [CYBG], which recently reported slow loan growth and pressure on net interest margins, has seen its shares dive from 205p in July to 132p by mid-August, before an upgrade by UBS [UBS] led to a 5% pop in recent days. RBS [RBS] shares have dropped from an April high of 270p to 185p with HSBC [HSBC] down from 670p to 603p, as of August 19.
Years of low-interest rates have also battered the share prices of European banks while the S&P, in its recent Global Banks Outlook, predicts that the European Central Bank is unlikely to raise interest rates until the second quarter of 2021.
Banks profitability has also been hit by populist political turmoil from Italy to Austria, the financial crisis in Greece and general economic sluggishness.
The problems have been compounded by the fact that as a group European banks were slower to make fundamental structural changes post-financial crisis than banks in the US and UK.
A European wide bailout was harder to co-ordinate in the Eurozone under the auspices of the ECB, and mergers between ‘national champions’ have been hard to create.
That is changing now with Deutsche Bank [DB] recently announcing a €6bn restructuring programme cutting 18,000 jobs and closing its equity sales and trading business. It posted a €3.1bn loss in the second quarter, the biggest since 2008, and has seen its shares fall from €9.77 last August to a lowest-ever €5.81 on August 15.
BNP Paribas has seen its shares dip from €48.99 in April to €40.79 (19 August) but maintains a healthy 6.3% dividend yield. Its €350m cost-cutting plan announced earlier this year has boosted second-quarter profits, up 3.1% to €2.47bn.
That gives hope that the restructuring across European banks could boost long-term share prices.
But crucially UK banks such as Lloyds, with PPI now a thing of the past and its post-financial crisis restructuring completed, are already making strides with new, simpler and more agile business models.
Bright sparks for Lloyds
Hargreaves Lansdown, although highlighting the “very painful” impact of an economic downturn for Lloyds, sees increased resilience at the bank.
“Lloyds is already the UK's biggest digital bank and further digitalisation aims to improve customer service and reduce costs. It will build on an already market-leading cost: income ratio and supporting profit growth even if income stalls,” its research said.
“Lloyds is already the UK's biggest digital bank and further digitalisation aims to improve customer service and reduce costs. It will build on an already market-leading cost: income ratio and supporting profit growth even if income stalls” - Hargreaves Lansdown
A focus on financial planning and retirement including a new wealth management partnership with Schroders [SDR], is also bolstering its model with the bank aiming for £50bn plus of new assets by 2020.
“If Lloyds can pull it off, the rewards could be substantial,” Hargreaves Lansdown states. “Investors could be on the receiving end of a sustainable and growing dividend.”
Russ Mould at AJ Bell highlights its prospective dividend yield of 6.1% - the second-highest among the 51 FTSE 100 companies that offer earnings cover for their dividend of more than 2 times. RBS has a yield of 5.4% and Barclays’ [BARC] yield comes in at 4.7%.
Lloyds’ PE ratio of 9.43 also beats other banks, with Barclays and RBS both looking relatively overvalued on a price-to-earnings basis, their ratios come in at 60.71 and 27.23 (TTM) respectively.
|PE ratio (TTM)||9.43||8.10||7.80|
|Quarterly Revenue Growth (YoY)||-12.60%||-14.50%||-4.20%|
Lloyds, RBS & Barclays share price vitals, Yahoo Finance, 20 August 2019
In regards to Analyst sentiment, it’s divided, with as many seeing the bank as a ‘Buy’ or Neutral. The key is what economic impact Brexit will have on the housing market and consumer and business defaults.
If Brexit is orderly then the Black Horse can continue making strides, but it could be one of the biggest fallers if economic chaos reigns.