While still trading at a discount to levels seen before June’s EU referendum, Lloyds Banking Group’s (LSE: LLOY) share price has recovered from the 38-month lows of 47.55p reached in the days following the vote. The bank was last trading around the 57p per share marker.
Investors feared a sharp drop-off in revenue growth at Lloyds as Brexit created economic Armageddon. But, aside from sterling’s collapse to its cheapest since 1848 versus a basket of major currencies in October, plenty of other gauges have remained broadly stable.
PMI surveys for the services, manufacturing and construction sectors haven’t signalled the sharp cooldown that many had predicted. Home price growth remains solid-if-unspectacular and high street sales continue to chug higher. Indeed, the British Retail Consortium announced yesterday that retail sales rose 2.4% in October, trashing the three-month average of 1.1% and representing the best monthly result since January.
Growth concerns
However, the full impact of Britain’s self-imposed exile from the European Union was never going to manifest itself in near-term datasets. Rather, the implications of this summer’s referendum is likely to play out in economic releases from 2017 onwards.
Indeed, economists have been busy taking the hatchet to their GDP growth forecasts for the UK in recent weeks, citing a range of factors from falling business investment through to the impact of runaway inflation on consumer spending patterns.
The boffins at the European Commission (EC) are the latest band to downgrade projections for next year, and economic expansion of 1% is now expected. This is a sharp reduction from the 1.8% rise predicted in May. And growth will remain subdued in 2018 at 1.2%, the EC said this week.
But aside from Brexit-related issues, the country also faces a string of other issues that could dent growth, from slowing global trade flows to the changing political landscape in Europe and the US.
And adding to the revenues woes of Lloyds and the rest of the UK-focused banking segment, the Bank of England is also likely to keep interest rates hovering around record lows to prevent the economy from flatlining, putting a further strain on profitability.
Cheap but cheerless
Given this backdrop, it should come as no surprise that the City expects Lloyds to endure an 8% earnings dip in 2017 alone.
So while the bank deals on a P/E rating of 8.8 times, this is in my opinion a fair reflection of the colossal task Lloyds will have to generate meaningful earnings growth rather than an attractive buying opportunity.
And those hoping for gigantic dividends may also end up disappointed. A 3.7p per share payout is currently forecast for next year, yielding a market-trumping 6.4%. But a likely continuation of PPI-related charges through to the end of the decade; a muggy earnings outlook; and Bank of England advice not to raise dividends after July’s liquidity injections could also see these figures miss the mark.
I believe there’s plenty of mud in the system that should discourage investors from buying Lloyds right now. The answer to the question in the headline therefore is “not yet”. As to when it will be safe, that’s down to Lloyds to find a way to kick-start earnings growth.