Shares across the banking sector have unsurprisingly dived in recent weeks as Britons appear to be increasingly edging towards Brexit.
Industry giant Lloyds (LSE: LLOY) has seen its stock value sink 14% since the start of June. And further weakness could be on the cards should polling data point to growing support for the leave campaign.
Latest numbers from IPSOS Mori showed support for a UK withdrawal nudging ahead for the first time since the body started its forecasts, the Evening Standard reported last week. It said 53% of Britons wished to exit the Union, although the tragic event of Thursday appears to have spurred a swing in the opposite direction.
Exit worries
The consensus from the business community suggests that Britain would be worse off should it choose to ‘go it alone’ later this week. In recent days the Confederation of British Industries (or CBI) advised that a UK exit “would mean a real economic shock,” adding that “a choice to leave will put British businesses out in the cold and hit jobs.”
This could spell disaster for Lloyds in particular. Unlike many of its banking rivals that have operations across many territories, Lloyds is reliant on the health of the British retail sector to keep driving revenues, meaning that a Brexit could cause havoc with its bottom line.
PPI pains
But this isn’t the only issue shaking investor confidence, with escalating misconduct costs also hurting Lloyds’ bottom line.
Investors cheered news that the Black Horse bank didn’t make any further provisions for the PPI mis-selling scandal during January-March. But Lloyds is widely expected to add to its existing £16bn bill as a proposed 2018 claims cut-off looms.
On the plus side…
But there are still reasons to be optimistic, in my opinion.
Firstly, the Financial Conduct Authority’s planned deadline provides Lloyds and its peers’ long-term outlook with a shot in the arm, the PPI saga having hampered earnings growth for what now seems an age.
On top of this, Lloyds’ Simplification restructuring plan is also likely to drag costs significantly lower in the coming years. Indeed, the bank saw operating costs fall a further 2% during the first quarter to a shade under £2bn.
And while Lloyds’ focus on the British high street may limit earnings growth compared to that of its rivals, this domestic focus at least protects it from the emerging market turmoil affecting the likes of HSBC and Santander.
About to bounce?
Indeed, I reckon Lloyds’ domestic bias should send the share price rocketing again should this week’s ultra-close referendum result in Britain remaining in the EU.
Current share prices certainly leave room for a hefty positive rerating, with Lloyds dealing on P/E ratings of just 8.9 times and 8.8 times for 2016 and 2017, far below the FTSE 100 average of 15 times.
And when you factor-in mammoth dividend yields of 6.5% and 7.6% for this year and next, I reckon Lloyds could gallop higher in the days and weeks ahead.