Investors in the big banks have had a bumpy ride for the last dozen years, and there’s little sign of respite.
Best of a bad lot
Barclays and Royal Bank of Scotland have both fallen more than 20% in the past year, and are down around a third over five years. That makes the recent performance at Lloyds Banking Group (LSE: LLOY) look relatively good, as it’s down ‘just’ 7% over one year, and 25% over five. It’s nothing to celebrate, though, is it?
I write this as someone who believes Lloyds can still be one of the most exciting stocks on the FTSE 100. It has so much going in its favour.
In February, the £40bn high street giant posted a 24% rise in 2018 post-tax profits to £4.4bn, although revenue growth was more sluggish, up just 2% to £17.8bn. It even managed to increase its net interest margins, albeit only slightly, from 2.86% to 2.93%.
Cheap as chips
The Lloyds share price looks dirt cheap, trading at just eight times forward earnings, while its price-to-book value is just 0.8. Earnings grew 52% in 2017 and 25% last year, and another 38% has been pencilled in for 2019 (although just 2% in 2020).
As for the dividends – it now has a forecast yield of a mighty 6%, covered 2.2 times by earnings. Back in the day, journalists would routinely cut and paste the phrase ‘dividend machine’ into articles about Lloyds. Those days are back. In a bid to further woo income seekers, it will pay quarterly dividends from 2020.
Lloyds will also breathe a sigh of relief when the deadline for PPI mis-selling claims arrives on 29 August, as it transgressed more than any other bank and has paid around £20bn in reparations.
World of worry
Problem is, I could have run through all these advantages at any point in the last five years, and it won’t have made any difference. The Lloyds stock currently costs around 57p, barely half the post-financial crisis peak of 107p it touched in September 2009.
A lot of worry has been priced in. Brexit is hanging over the UK economy which hurts Lloyds with its relentless domestic focus. If Britons are reluctant to take out mortgages, Lloyds will feel the pain and so will investors. Similarly, if borrowers slip into arrears, whether individuals or small businesses, Lloyds and its investors will suffer.
Royston Wild sets out some of the dangers here, noting impairments jumped 18% last year to £937m, as economic activity slowed.
New challenge
The new swathe of challenger banks could also make inroads into its retail business, although most of these focus on savings rather than mortgages, where Lloyds scarcely bothers to compete these days. This is disappointing for what is now an old-fashioned “savings and loans business”. It’s also odd calling it a high street bank, given all its branch closures.
However, this also reveals a ruthless intention to compete, that should stand Lloyds in good stead. Unlike Barclays, it doesn’t have to worry about a misfiring corporate and investment banking division. I would buy Lloyds rather than sell, although investors might want to don a tin hat if we get a no-deal Brexit or global recession.