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Will supporting small businesses pay dividends for Lloyds’ share price?

Will supporting small businesses pay dividends for Lloyds’ share price?

Between the coronavirus and Brexit negotiations, Lloyds’ [LLOY] share price has had a rotten start to December. Between 7 December, when word first emerged that the UK might leave the EU without a trade deal, and 21 December, two days after Boris Johnson’s shock announcement that the south east would be put under ‘tier 4’ lockdown, Lloyds’ share price has fallen 10.1%.

Yet there has been some positive news for Lloyds’ share price. Last week the bank resumed opening small business accounts — a godsend for new businesses that could play a role in revitalizing the UK economy in the months ahead. 

 

 

Small business banking lifts Lloyds’ share price

Lloyds caught some flak back in October, when the Daily Mail reported it had stopped opening business current accounts. At the time, Lloyds claimed itself and other big banks were too busy processing bounce back loan requests from existing customers. By the start of December, another report revealed that Lloyds was again not opening business current accounts. The reason, according to an industry source contacted by The Mail on Sunday, was that over half of the applications were potentially fraudulent. 

Obviously, being unable to open an account has serious repercussions for any small business as they seek to borrow and take payments. It also hinders any wider economic recovery. Lloyds finally started opening small business accounts again at the start of last week. This saw some positive movement in Lloyds share price, with the stock gaining 5.5% by Wednesday morning. 

Small business banking could be a growth area for Lloyds. The Times reported on 28 November that the UK heavyweight was considering buying Starling Bank. Picking up the challenger bank, which specialises in business accounts, would give Lloyds an additional 1.8 million customers, with deposits worth over £3.6bn. 

Right now, this is just speculation, with a Starling spokesperson saying that Anne Boden, Starling’s CEO, would “never sell to a big bank” and taking the challenger bank public was still the goal. Still, if such a deal happens — with Starling or another challenger bank — Lloyds’ share price might see a boost as it expands its digital banking footprint in business banking.

 

Lloyds’ staff to miss out on bonuses

Despite being well capitalised and having enough money to consider buying challenger banks, Lloyds hasn’t got off lightly. The Financial Times reported on 18 December that Lloyds is to cancel staff bonuses this year, after a sharp drop in profit caused by the coronavirus. In an internal memo seen by the paper, Lloyds’ people and property director Matt Sinnott said:

“Despite the good news about the vaccine rollout, like most of our peers our year-to-date business performance continues to be challenging. While we have returned to profit, we are not where we expected to be and are short of the commitments we made to ourselves and our shareholders.”

 

"While we have returned to profit, we are not where we expected to be and are short of the commitments we made to ourselves and our shareholders" - Matt Sinnott, Lloyds' people and property director

 

There won’t be too many tears shed for bankers being denied a payout, but shareholders may well be concerned by profits that are down 85% for the first nine months of the year compared to last year. With interest rates likely to remain low even after the worst of the pandemic is over, margins are likely to remain under pressure for some time yet, along with Lloyds’ share price.

 

Where next for Lloyds’ share price?

With large parts of the country now in a tier 4 lockdown and reports the measures will last into April, coupled with the continuing saga of Brexit negotiations, Lloyds’ share price could see plenty of volatility in the near-term.

Yet for traders taking a longer-term view, the bank is profitable and dividends are likely to resume next year. There is also the promise of the bank diversifying further into wealth management in 2021 — potentially making it more resilient against the economic headwinds that have plagued the stock in 2020.  

Analysts offering 12-month price targets on the Financial Times have pinned 40p on Lloyds’ share price, a 19.1% upside on the current price (as of 21 December’s close). The most optimistic of these is 45p, which would see a decent 34% upside. 

 

Market cap £24.489bn
PE ratio (TTM) 34.58
EPS (TTM) 1.00
Quarterly revenue growth (YoY) -18.80%

Lloyds' share price vitals, Yahoo Finance, 22 December 2020

 

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