The 3 items that could crush Lloyds Banking Group plc in 2017

Today I’m looking at three issues that could damage Lloyds Banking Group (LSE: LLOY) this year.

Falling demand

Lloyds saw its share price take a hammering in 2016 as investors digested the prospect of prolonged Brexit-related troubles for the UK economy.

The Black Horse Bank has seen its share price fall 11% since June’s now-infamous referendum, and with good reason — while economic data has been far-better-than-forecast in recent months, City consensus suggests that things are about to get much tougher in 2017 and beyond. And recent economic data backs these forecasts up.

The Bank of England announced a shock fall in mortgage approvals in November, reflecting new buy-to-let lending restrictions as well as moderating appetite from first-time buyers. And the British Bankers’ Association commented that loans to business slumped £1.2bn in November, flipping from the £1.4bn rise punched the previous month.

Adding to these obvious pressures, signs of rising stress on the domestic economy are likely to keep the Bank of England’s base rate locked around record lows. And this puts Lloyds’ profits outlook under even more pressure.

Bad loans to bounce

A flailing economy also raises the chances of bad loans at Lloyds heading through the roof. Consumer credit continues to climb thanks to incredibly-favourable interest rates, and Bank of England data showed credit card debt ballooning to a record £66.2bn in November. At the same time shoppers’ financial health remains extremely fragile, however. Indeed, a uSwitch survey last week showed that half of those surveyed expect to still be paying off their cards next Christmas.

And a perfect storm of rising inflation, sluggish wage growth and falling employment could heap further pressure on consumers’ abilities to pay off their debts next year, leading to a likely rise in bad loans over at Lloyds and its peers. December’s acquisition of MBNA increases Lloyds’ exposure still further.

PPI troubles to persist

The banking sector received even more bad news during the summer as the Financial Conduct Authority (FCA) announced plans to extend a previously-touted 2019 cut-off for new PPI claims by a year.

Lloyds had stashed away a further £1bn during the third quarter to cover possible costs up to this date, taking total provisions to date to an eye-watering £17bn.

But the bank may have to keep raising funds to cover the issue after the FCA delayed making an announcement on a final deadline date until the first quarter of this year, the body citing the large amount of feedback during its consultation process.

Lloyds et al already face an explosion in the number of claims, the Financial Ombudsman announcing in December that it expects 360,000 new claims during the 2017/18 financial year. This is up from a predicted 170,000 in the current period, the likely upswing set to be “heavily influenced” by talk of an upcoming deadline, the ombudsman noted.

And with the FCA preparing to launch a £42m marketing campaign in mid-2016 to remind customers of the upcoming deadline, at least according to the Financial Times, Lloyds and its peers face a heavy stream of new claims in the months — and years — ahead.