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What could a no deal Brexit mean for Lloyds’ share price?

What could a no deal Brexit mean for Lloyds’ share price?

Spare a thought for Lloyds' [LLOY] share price. No sooner had it mounted a recovery in November, thanks to the Pfizer [PFE] and BioNTech [BNTX] vaccine breakthrough, than Brexit fears resurfaced to put pressure back on the stock. 

Lloyds’ share price plunged 8.76% last week, as a no deal Brexit seemed the most likely outcome from trade negotiations between the UK and EU. Thursday and Friday's trading bore the brunt of these losses as Boris Johnson's dinner with European Commission president Ursula von der Leyen ended without a breakthrough.

Von der Leyen is reported as saying that discussions were “lively” but that there were still major differences on key issues, while Boris Johnson said leaving the single market was “very, very likely”. 

 

 

How is Lloyds’ share price holding up?

Lloyds’ share price is often described as a bellwether of the UK economy, meaning the unexpected resurgence of a possible no deal is bad news. Having started last week at 37.96p, Lloyds’ share price closed it down at 34.07p.

Sunday saw some political headway as Johnson and von der Leyen agreed to keep trade talks going following a telephone call — a discussion that the EU described as “useful and constructive”. This might stave off some losses for Lloyds’ share price but, with the Brexit transition period ending on 31 December, the stock is likely to see more turbulent trading through the new year. 

For Lloyds shareholders, this is yet another headache in what has been a tough year. March saw the stock cut in half as the coronavirus pandemic took hold, followed by a prolonged slump for much of the year. Things finally picked up in November as Lloyds’ share price rallied 26.67%, with talk of the stock cracking the 40p level earlier in December. 

Still, for bargain hunters, the recent losses could represent an opportunity to buy Lloyds’ share price at a discount, although only if the UK economy is able to recover.

 

Why would a no deal Brexit be problematic for Lloyds’ share price?

Lloyds’ share price is tied to the UK’s economic performance, so it's no surprise it saw volatility last week. Economic forecasts in the event of a no deal are decidedly glum, meaning the stock is likely to come in for more punishment.

According to the Office for Budget Responsibility, GDP could fall 2% next year without a deal in place. By 2025, a no-deal scenario would see output 1.75% lower than the watchdog’s central forecast for a post-pandemic recovery.

 

2%

Estimated drop in GDP in event of no deal Brexit

 

In 2019, the EU accounted for 43% of UK exports and 51% of its imports, according to the BBC. The treasury watchdog estimates that a no-deal Brexit would result in 300,000 job losses next year. The OBR also expects industries that were resilient during lockdown — like manufacturing and agriculture — will fare worst in a no deal. 

Adding pressure will be the introduction of WTO trading terms that would see a hike in export tariffs, including 10% tariffs on car sales. This could negatively affect revenues and wages, which in turn will hurt banking stocks like Lloyds.

 

What does this mean for Lloyds’ share price?

The long-term effects of a no-deal are highly unpredictable. The big question for the government right now is how they can mitigate short-term economic problems so soon after the pandemic.

The Bank of England’s most recent financial sustainability report highlighted that UK banks were well capitalised and could sustain "very big losses" as they continue to lend. Lloyds itself has a robust CTE1 ratio of 15.52%. The UK government has also announced that it would underwrite loans to boost overseas sales following the departure from the EU. For Lloyds, which will offer these loans, it should provide some protection for its business lending operations.

 

15.52%

Lloyds' CTE1 ratio

 

Lloyds itself swung back into profit in the last quarter and, with a 0.57 book value per share in the most recent quarter, the stock is potentially undervalued right now. 2021 will see the arrival of a new CEO, Charlie Nunn, who has a mandate to diversify the bank's revenue streams. If successful, this should make the bank more resilient to downturns in the UK economy. 

 

Where next for Lloyds’ share price?

With Brexit, it would seem that a deadline is never a deadline. Even if a compromise is not reached this year, the Financial Times is reporting that the EU will urge the UK back to the table in January. 

As the repercussions of a no-deal/deal scenario normalise, Lloyds looks well positioned to weather the storm on a fundamental level, just as it has the pandemic. Provided the UK economy recovers from both the coronavirus and a change in trading relations with the EU, Lloyds’ share price could represent good value at its current level. 

Traders taking the long-view could interpret any further fall in Lloyds’ share price as a buying opportunity. In the run-up to the EU referendum in spring 2016, the bank's stock tanked before recovering most of the losses by early 2017. 

Analysts tracking Lloyds’ share price on the Financial Times have a 40p price target, which would see a 12% upside on the current share price through 14 December’s close. The most optimistic price target is 45p — a 25.9% upside.

 

Market cap £25.548bn
PE ratio (TTM) 36.07
EPS (TTM) 1.00
Quarterly revenue growth -18.80%

Lloyds' share price vitals, Yahoo Finance, 15 December 2020

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