To describe Lloyds’ (LSE: LLOY) stock price dive in recent weeks as ‘shocking’ could be considered something of a mammoth understatement.
Shares have haemorrhaged more than a quarter of their value since June’s EU referendum as investors have fretted over the impact of a sharply-cooling UK economy on Lloyds’ top line.
Data drags
And the Footsie’s major banks experienced fresh pressure on Monday as the true picture of ‘Brexit Britain’ continues to emerge.
The latest Markit PMI gauge for the manufacturing sector slid to 48.2 in July, down from 52.4 a month before and the first ‘contractionary’ reading since April 2013. Market confidence has also been battered by negative releases for the services and construction industries in recent days.
A sharp recession is looking increasingly likely as consumer and business confidence dives. This naturally bodes badly for the likes of Lloyds, which relies on a healthy UK retail banking sector to drive earnings.
A 14% bottom-line slip is predicted at Lloyds for the current fiscal period. While this results in an ultra-low P/E rating of 7.2 times, I believe it’s hard to justify investment at the present time.
The full scale of Britain’s likely economic downturn is yet to be accurately gauged. And Lloyds lacks the international footprint of rivals like Barclays and HSBC to generate growth while conditions at home worsen.
Meanwhile, the likelihood of fresh interest rate cuts by the Bank of England this week leaves Lloyds’ profits outlook in even more of a pickle.
Capital punishment
On the plus side, stress test results released on Monday underlined Lloyds’ position as a well capitalised bank.
Under the ‘adverse scenario’ Lloyds came out with a CET1 ratio of 10.1%, echoing the excellent work achieved under the bank’s Simplification cost-cutting programme. By comparison Barclays and RBS were Britain’s most cash-starved banks, the firms sporting capital ratios of just 7.3% and 8.1% respectively.
But this doesn’t necessarily mean that Lloyds’ dividend prospects will receive the shot in the arm many investors had been hoping for just a few months back.
The part-nationalised bank would find it difficult to justify lifting shareholder rewards should the UK enter a painful recession. Indeed, chief executive António Horta Osório may find it hard to splurge out with chunky dividends should earnings look set to lag.
Meanwhile, the Bank of England’s decision to pump £150bn into the banking sector in July came with the caveat “that firms do not increase dividends and other distributions as a result of this action.”
Although non-binding, the cards would appear stacked against Lloyds raising 2015’s total dividend of 2.25p per share to a widely-predicted 3.4p for the current period. Investors should therefore pay little attention to a market-mashing 6.5% yield, in my opinion.
While Lloyds’ share price may have bounced from recent multi-year troughs, I believe the bank could find itself on the defensive again if — as anticipated — poor economic data, and subsequent support from Threadneedle Street, emerges in the weeks and months ahead.
