After a breathless couple of years, which saw shares in Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US) more than double in value, 2014 was a disappointment.
At 79p, the Lloyds share price is roughly where it was at the start of the year, as is the FTSE 100 for that matter. That’s hardly surprising, it couldn’t maintain recent growth rates forever.
But can Lloyds pick up the pace again in 2015?
Right Direction
The recently reported 35% rise in underlying Q3 profits to £5.97bn suggest something is going right at Lloyds. Impairment charges are down nearly 60%, deposits are growing, non-core countries are being cast aside, and a simplified, focused operation is taking shape.
Lloyds is also cutting costs by closing 150 branches and laying off 9,000 staff, which always cheers the City, while planning to invest £1 billion in its digital banking operation.
Wrong Way
The downside of all that is that shrinking its area of operations from 30 to just seven countries leaves it heavily exposed to the domestic market, which is fine when the UK economy is the fastest-growing in the G7, but leaves it vulnerable to a slowdown.
The cooling UK housing market is a concern, as that will hit earnings. Worryingly, the UK’s third-largest lender, Nationwide, has just reported a 36% drop in mortgage business in the last six months.
As the UK’s biggest lender, Lloyds has reason to worry. Its subsidiary Halifax forecasts that house price growth will slow to between 3% to 5% next year, with May’s general election adding to the uncertainty.
That puts the share price on shaky ground.
Toxic Shocker
Not only is the UK market is slowing, it is also getting increasingly crowded, as challenger banks such as M&S, Tesco, Virgin and others compete for share.
The PPI mis-selling scandal will rumble on, and no doubt other nefarious banking behaviour will be discovered.
Cass Business School has warned it will take 20 years to clean up the toxic culture that has so far cost the UK banks more than £38.5bn in fines and compensation, although investors have learned to take this in their stride.
Fasten Your Belts
There is also the overhang of selling the remaining taxpayer stake in the bank, but the election is likely to get in the way of that. At least investors can finally hope for some kind of dividend next year.
The UK faces a rocky road in 2015, both economically and politically, and given Lloyds’ domestic exposure, investors in the bank should also brace themselves for a bumpy ride.