It was perhaps an inevitability following recent reductions by the Federal Reserve. On Wednesday, the Bank of England, spurred into action by the coronavirus crisis, hacked back interest rates to all-time troughs of 0.25%.
While likely to be temporary, Threadneedle Street warned that “the disruption arising from Covid-19 could be sharp and large.”
A reduction of half a percentage point, though, was more than many had been expecting. The new rate matches the lows plunged in the aftermath of the summer 2016 Brexit referendum. And it provides more headaches for the high street’s major banks such as Lloyds Banking Group (LSE: LLOY), RBS and Barclays.
A BIG problem
A backdrop of low interest rates has crushed the profitability of these FTSE 100 firms over the past decade.
They’ve had a litany of other problems to contend with, sure. Massive restructuring, huge balance sheet repairs, and colossal misconduct costs are just some of the big issues they have had to wrestle with. The PPI mis-selling scandal cost the industry a whopping £53bn, according to lawyers Gladstone Brookes.
It’s the persistence of ultra-loose monetary policy, though, that’s constrained profits growth at Lloyds and its peers in that time. The banks have been unable to join in on the recovery of the broader Footsie following the lows of the 2008/2009 financial crisis because of rock-bottom rates.
Share price strain
The banks’ share prices over the past decade illustrate the ruinous effect of doveish Bank of England policy. Lloyds, for example. now trades at 43.4p per share versus 58.5p in March 2010.
The benchmark of 5% in September 2008 was cut to just 0.5% within six months. Levels haven’t recovered since then, either, sitting at a post-crisis top of 0.75%, just before today’s reduction.
Rate cuts in the wake of the Brexit vote four years ago put paid to hopes of increased tightening by the Bank of England. Lloyds’ share price consequently fell further away from the last decade’s share price highs of 89p hit in 2015.
It’s unlikely that the bank will move close to these peaks any time soon, either, given the pressure that European Union withdrawal is causing to the domestic economy and the need for interest rates to remain at all-time lows.
Stay away!
Office for National Statistics data, also released today, illustrates the disastrous impact of the Brexit saga on growth. This showed there was zero growth in UK gross domestic product during the three months to January.
I’m not the only one fearing what devastation later releases will show when the effect of the coronavirus on the already-battered economy becomes apparent.
Lloyds latest financials underlined the ongoing pain it’s experiencing in these tough conditions. And today’s interest rate news adds to the sense that 2020 will be another washout. This is why I’m neither interested by the bank’s low forward price-to-earnings ratio of 6.5 times nor its 8% dividend yield.
The chances of Lloyds struggling well into the next decade are far too high for my liking. I think it’s a share investors should keep on avoiding.
