I’ve recently been thinking about the bear case for Lloyds Banking Group (LSE: LLOY) in 2020. And though I really see the bank as a strong long-term income buy, it could be in for a rockier ride in the short term.
But could anything turn the tables in 2020 and lead to a Lloyds share price rally? Here are three things I think might do the job.
Brexit
The most obvious thing, I think, would be a Brexit trade deal breakthrough.
Lloyds doesn’t have direct exposure to European banking any more, having refocused itself as a UK retail bank. But that does make it dependent on the UK economy and on the levels of mortgages and business loans it can offer. And the outlook for the UK economy isn’t looking great right now.
If we suffer poor (or no) growth, fewer businesses will chase funding, and fewer people will want to buy new houses. All that would weaken business for Lloyds, depress its profits, and perhaps even threaten its precious dividend.
A trade deal with Europe could well be the thing that makes the difference between modest economic growth and recession. So come on Boris, for the sake of our dividends…
Dividend
Speaking of dividends, one of the things Lloyds’ bears fear is a cut. The bank was forced to halt its share buyback programme when PPI claims climbed way above the levels we’d been expecting. But that’s over now.
And there’s one positive I take from it, considering some commentators were predicting a dividend cut and a share price collapse should the PPI total rise too high. Well, it reached an eye-watering £21.9bn, but the share price didn’t collapse. And there’s no sign of a dividend cut.
In fact, Lloyds has just lifted its 2019 dividend by 5% to 3.37p per share. Not only wasn’t it cut, it was raised by more than twice the rate of inflation.
Still, other things could impact on the dividend, like proposed new legislation requiring even better levels of liquidity in the future. But on that score, we’re out of the EU now, so there should be less pressure from that direction.
The longer we get into 2020 without a dividend cut, the more I can see the share price gaining ground.
Consumer debt
Could a consumer credit bust be a cause of dividend pressure? On top of falling mortgages and business loans, a rising tide of consumer debts going bad could turn the screw on the dividend.
But I saw nothing to worry me on that score in the 2019 results. And while I think a continued economic downturn almost certainly will lead to increased bad debts, I don’t see a credit bust.
The main reason is there hasn’t been a credit boom. Since the banking crisis, UK discretionary spending has remained very restrained — just ask any high street retailer how things are going.
Big names going bust, or struggling, really does feed back to the spending public. And when we see companies like Thomas Cook failing, it puts is in a pessimistic mood and helps keep our hands in our pockets.
The more we don’t see escalating bad consumer credit, the more I think we could see improving share price strength.