At first glance financial giant Lloyds Banking Group (LSE: LLOY) would appear to be a bona fide bargain at current prices.
The share-price washout following June’s EU referendum leaves the banking leviathan dealing on a forward P/E rating of 8.1 times, well short of the FTSE 100 average of 15 times.
Lloyds’ reading also trumps those of many of its banking sector rivals — HSBC, Barclays and RBS, for instance, trade on prospective P/E ratios of 13.3 times, 15.3 times and 17.5 times respectively.
And the ‘Black Horse’ bank also appears to be a snip for dividend chasers. City predictions of a 3.2p per share payout yields a sector-smashing 5.4%, and also trumps the big-cap average of 3.5%.
Dire data
But not even these ultra-low valuations should be enough to tempt savvy stock pickers to invest in Lloyds, in my opinion.
This week the British Banking Association (BBA) announced that bank loan applications to small-and-medium-sized businesses dropped 10% during the second quarter, to 34,828.
Mike Conroy, the BBA’s managing director for business finance, commented that “the first half of this year saw a drop in loan applications amid uncertainty around the EU referendum, and lower business and consumer confidence.” And Conroy noted that “SMEs increased their cash deposits as a buffer in response to this uncertainty.”
While it’s too early to understand the full financial implications of Brexit, the BBA’s release comes as little surprise as companies brace themselves for a period of painful economic adjustment.
And this is not the only worrying dataset to dent Lloyds’ revenues outlook. Mortgage approvals sank to their lowest for 18 months in July, according to the Bank of England, as homebuyer appetite cooled down.
And the British Retail Consortium advised this week that UK retail sales slumped 0.3% during August, swinging from the 0.1% rise punched in July and marking the worst performance since September 2014.
Against this backcloth, the City expects earnings to dip 14% year-on-year in both 2016 and 2017. And with interest rates likely to be remain around record lows to stave off economic armageddon, the chances of a bottom-line recovery at Lloyds would appear a long way off.
Dividends doomed?
Naturally this poor growth outlook should come as enormous concern to income investors. But this is not Lloyds’ only worry as the battle against misconduct charges rumbles on.
The Financial Ombudsman received 91,381 new PPI-related complaints during January-June, it advised this week, roughly in line with the 92,667 cases filed in the corresponding 2015 period. And Lloyds was by far the worst culprit, accounting for around a third of all new PPI cases.
Lloyds has already set aside £16bn to cover the cost of the mis-selling scandal. And this figure looks set to keep growing ahead of a potential 2019 deadline.
On top of this, the Bank of England’s decision to ease capital restraints on British banks back in July came with the advice that the likes of Lloyds don’t use the extra liquidity to raise dividends.
Given these factors, I think the part-nationalised bank may find it difficult to meet current projections and raise last year’s 2.25p per share reward.