Lloyds’ [LLOY] share price has been in a slump since the coronavirus hit back in March. While there have been some recent gains, the stock hasn't managed to make a sustained break beyond the 30p mark. Last week Deutsche Bank cut its target for Lloyds’ share price from 34p to 32p, saying in a note to clients:
“We remain cautious on UK banks and prefer banks with less rate sensitivity, more diverse income, flexible cost bases and at lower valuations.”
The German bank noted uncertainty over unemployment and the risk of further interest rate cuts as causes for concern for Lloyds’ share price going forwards.
“We remain cautious on UK banks and prefer banks with less rate sensitivity, more diverse income, flexible cost bases and at lower valuations” - note to clients from Deutsche Bank
Lloyds, as the UK's biggest lender, is sensitive to any change in interest rates. According to the Financial Times, every 0.25% reduction in rates knocks off almost £150m in annual interest income for the bank. This makes boosting its businesses that are not dependent on interest rates a priority if Lloyds’ share price is to regain its previous highs. Chief among these other businesses are the bank’s wealth management services.
Given the headwinds facing the economy, is this diversification really enough to see Lloyds’ share price gain in the second half of 2020?
Will wealth management help Lloyds’ share price?
Extending its wealth management services could be the obvious move for saving Lloyds’ share price. For a long-time, the bank's focus on the UK retail market has made it incredibly susceptible to changes in the economy. In recent years, these changes have been monumental, including the Bank of England’s coronavirus-related interest rate cuts and existential fears over Brexit.
To remedy this, Lloyds partnered with Schroders to launch Schroders Personal Wealth. With Schroders’ expertise and Lloyds’ customer base, this could quickly rival established players in the personal wealth management sector, including St James’s Place. Schroders is also taking on £80bn of Lloyds-owned Scottish Widows assets.
Yet, for all the financial firepower, the new venture has gotten off to an underwhelming start, and has not noticeably boosted Lloyds’ share price so far. Net inflows were just £100m in the first half of the year as the coronavirus saw branches close across the country. Still, net new business came in at £42.7bn, compared to £2.1bn in the same period last year, although the bulk of that was a £29.5bn transfer of the remaining Scottish Widows mandate from Standard Life Aberdeen.
Valuation of Lloyds' net new business
The messy breakdown in business with Standard Life goes back to 2017 when the wealth management firm merged with Aberdeen. Lloyds claimed Standard Life Aberdeen was a rival to Scottish Widows and shredded its contract with the fund manager, before announcing a strategic partnership with Schroders.
It now appears that Lloyds’ residual relationship with Standard Life Aberdeen is finally coming to an end, with the bank pulling more money from the investment firm — this time from the fund manager's £500m Global High Yield Bond fund. The bond fund will close on 26 October, with investors given the choice of taking their holdings or continuing to have them managed in another product.
So, time to buy Lloyds?
Wealth management is expected to play a bigger role in Lloyds’ next strategy update. In 2019, it accounted for circa 15% of Lloyds’ underlying profit, coming in at £1.1bn. Increasing this area could protect revenue and Lloyds’ share price as the bank’s lending businesses come under pressure, not least due to the likely spike in loan defaults in the second half of 2020.
One of the bank's top-10 shareholders told the Financial Times in June that “[Lloyds] have the joint venture with Schroders and are trying to push more into the Scottish Widows business, so we would like to see more of that.”
“[Lloyds] have the joint venture with Schroders and are trying to push more into the Scottish Widows business, so we would like to see more of that” - One of Lloyds' top shareholders
How this all pans out remains to be seen, although analysts seem confident that Lloyds’ share price will see further upside. On the FT, the stock has an average price target of 38p, which would see a 36.5% upside if hit. Of the 23 analysts tracking the stock, 4 rate Lloyds a Buy and 11 Outperform.
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