It’s no surprise to me to see that Lloyds Banking Group’s(LSE: LLOY) share price kept on tanking last month. How could it not given the UK’s pathetic growth outlook?
The Office for Budget Responsibility (OBR) this week tweaked its GDP estimates and it now expects growth of 1.3% this year and 1.6% next year. It’s predicting pretty poor economic expansion of 1.4% in each of the following two years too.
And this is assuming that Britain can avoid falling out of the European Union next March without a trade deal, a catastrophe that is becoming ever more likely as the months progress. Expect the OBR’s fresh estimates to go through the shredder should British and European negotiators fail to reach an accord.
Revenues flatline, bad loans rise
In this depressing environment, Lloyds has seen its share price sink 16% so far in 2018, the FTSE 100 business closing at its lowest since November 2016 in recent weeks. Not even the release of better-than-expected financials last month could lift the gloom surrounding the Black Horse Bank as investors fret over what Brexit will bring (in the immediate term and beyond).
Underlying profit of £2.07bn for the July-September quarter may have sprung past analyst forecasts, but it wasn’t exactly outstanding as the bottom line remained stagnant on a year-on-year basis. In fact, when you factor in Lloyds’ colossal restructuring costs, profit before tax actually dropped 7% from the same 2017 period, to £1.82bn.
This wasn’t the only bad news either. Net income rose 5% in the first nine months of the year, but this has slowed to a crawl in recent months and it flatlined at £3bn for the third quarter. Latest data from the Bank of England does not suggest that revenues at Lloyds are set to pick up any time soon either. Its most recent consumer credit report showed annual growth in borrowing falling to 7.7% in September, the lowest rate since June 2015.
To round off another worrying release, Lloyds revealed that impairments continued to rise in the last quarter, resulting in £740m worth of cumulative charges up to September versus £538m a year earlier. And as my Foolish colleague G A Chester recently pointed out, Lloyds is sitting atop a dirty great consumer debt bubble. Brexit could be the opportunity that it’s been waiting for to burst.
6% yields? No thanks!
Glass-half-full investors would argue that Lloyds’ cheap forward P/E multiples of 7.9 through to the close of next year reflect the firm’s high risk profile. I don’t think so as the possibility of next year’s predicted 1% earnings fall is in jeopardy of undergoing scything downgrades in the months ahead.
The possibility of collapsing earnings, not to mention the prospect of booming PPI-related bills ahead of next summer’s claims deadlines, also causes me to doubt that Lloyds will have the strength to keep hiking dividends at breakneck pace. Thus yields of 5.5% and 6.1% for this year and next respectively hold little sway for me.
Lloyds is cheap, but it’s cheap for a reason. In the current climate I believe the bank can sink much, much lower, and for this reason I’m giving it a very wide berth.