2019 has proved to be another rollercoaster ride for Lloyds Banking Group (LSE: LLOY), its investors and its share price, as Brexit concerns have prompted a frantic tug-of-war between buyers and sellers.
Through the fog, however, the FTSE 100 bank has actually performed pretty well in the circumstances, its share price up 13% since New Year’s Day. That’s not to say I’ll be buying into Lloyds any time soon, as there remain several big reasons why the share price could sink in 2020.
More rate cuts
Britain’s banks have long been plagued by an environment of rock-bottom interest rates. Even as the global economy steadily recovered from the 2008/2009 financial crisis, central banks were determined to maintain a loose monetary policy, a gradual winding back of quantitative easing offset by keeping rates around record lows.
This is seemingly the new normal and gives little chance for Lloyds and its peers to step up their profitability. In fact, with the UK economic growth currently flailing at nine-year lows, it looks as if the Bank of England will be forced into reducing rates back towards recent all-time troughs of 0.25% in the months ahead.
The chances of Mark Carney and his crew slashing the benchmark has become a little more likely following the release of inflation data today. According to the Office for National Statistics, the consumer price inflation gauge dropped to its lowest for almost three years, at 1.5% in October, giving policymakers a little more wiggle room to cut rates.
A hard Brexit happens
As I mentioned above, Britain’s banking stocks have been caught in a current of wild changes in investor confidence this year. Widespread fear of the UK embarking on an economically-calamitous no-deal Brexit, first in March and then in October, gave way to huge relief as lawmakers in London and Brussels eventually kicked the can down the road.
Under the latest extension, we’ll be leaving on January 31. And, unlike in previous times, the likelihood of the UK leaving on that date, with or without a deal, is very real. However, even if Westminster politicians elect to leave under the terms of Boris Johnson’s withdrawal agreement early next year, the chances of Britain actually falling off the cliff edge later in 2020 remain high.
The government will have just 11 months to broker a trade deal with its European Union counterparts under this scenario. And with both sides driving a hard bargain, it’s quite possible the UK will slide off that cliff edge on December 31 2020.
Dividends diced?
Given the prospect of low interest rates and Brexit-related chaos rolling into the new year, it’d be foolhardy not to consider the possibility that Lloyds will hack back the dividend in 2020.
It’s important to stress that the alarm bells aren’t ringing just yet, and City analysts certainly believe the Black Horse Bank will keep growing annual payouts through to the end of next year (a 3.6p per share reward is currently predicted, resulting in a 6.1% yield).
Though following its decision to axe its share buyback programme in September, investors clearly need to be prepared given its patchy profits outlook and creaking balance sheet.
Brokers forecast a 2% earnings drop in 2020 although there’s plenty of scope for this to be seriously downgraded, certainly in my opinion.