Why Lloyds Banking Group plc would be a bad investment in the event of a Brexit

This Fool explores the effect of an ‘out’ vote on Lloyds Banking Group plc (LON: LLOY).

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The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

It’s a debate that looks likely to tear the Conservative party apart if some of the reports are true. However, with less than a month to go before Britain goes to the polls, there’s still everything to play for.

Should I stay or should I go?

As an investor I’m less worried about political mud being slung by both sides as I see this as the everyday norm in UK politics with the only change being the subject matter.

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No, I’m more focused on the impact the vote going either way could have on my investments. Now I should say from the off – I haven’t sold all of my investments with a view to buying back after 23 June – that could turn out to be folly. But I’m currently wary of certain shares that are economically sensitive and could sell-off in the event of a leave vote – or more to the point the fear of the impact that a vote for Brexit would have on the economy as a whole.

Now I’m no economist, nor am I about to offer my personal view as to which way I will be voting or try to sway readers either way – in my view the decision should be made with all of the information to hand. However, there’s no shortage of views wherever you look, and while some don’t stand up to scrutiny, there are, in my view some by respected organisations on both sides of the debate that should be considered further.

But what if?

One of the starkest warnings came from the treasury on Monday, which suggested leaving the EU would tip the UK into a year-long recession, with up to 820,000 jobs lost within two years. In response Boris Johnson dismissed the study as “more propaganda” from the remain side, which he claimed was “rattled“.

However, if we did vote leave and the recession came I think that it would be particularly bad for more domestically-focused banks such as Lloyds (LSE: LLOY).

You see, Lloyds is a geared play on the UK economy. As we’ve witnessed since the financial crisis and the near fatal acquisition of HBOS, the bank has been putting itself back on a firmer footing, returning to growth and even paying dividends, which are expected to grow quickly from here.

However, what if we do get the threatened recession? With consumer debt levels not far off those pre-financial crisis and house prices at record highs (partially driven by ultra-low interest rates and fairly easy access to credit), I can see Lloyds having to make higher provisions for bad debt, and writing down the value of property on its mortgage books as some customers will struggle to service their debt if the economy dips.

However, as we can see from the chart Mr Market seems to be predicting the voting public will choose to stay in Europe given the recent strong run-up of the shares over the last few trading days.

Despite the strong run, the shares still trade on a single-digit forecast P/E and are set to yield over 6% according to data from Stockopedia. And while there may be volatility going forward, especially if the polls are wrong, the shares are worthy of further research for those with a long-term view.

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