Market expectations for 2017 are far lower for Lloyds (LSE: LLOY) than they were at the beginning of 2016. Between the government deciding to cancel its retail investor share sale due to low prices, Brexit fanning fears of a domestic recession and investors fleeing to US-centric banking shares after Trump’s shock election victory, 2016 seems to have taken the shine off Lloyds. But is this negativity warranted going? And what big events should investors keep their eye out for in 2017?
The biggest question mark looming over Lloyds is something entirely out of its control: the health of the domestic economy. As the country’s largest retail bank and biggest originator of new mortgages, shares are sure to feel the brunt of any market pullback should GDP growth slow or unemployment rise. The good news on this front is that all signs post-Brexit vote are pointing towards continued economic growth. That said, if I were a Lloyds shareholder I would keep a close watch on the ONS’s next unemployment report on January 18 and GDP report on January 26.
The next two news items that could have a big impact on its shares stem from possible government actions. The first, and most important, would be the FCA finally placing a firm deadline for claims related to PPI mis-selling. The FCA has now said it will make a decision in Q1 of this year, but this decision has been delayed before. A firm deadline would be huge news for Lloyds as the bank’s management is confident the £1bn set aside in Q3 will put to an end to what has become a £17bn cash drain.
The other possible good news from the government would be that it has finally sold off its remaining stake in Lloyds. After a series of recent sales, that stake is below 6% of outstanding shares. Moving past this remnant of the Financial Crisis bailout would be a huge step for Lloyds in finally looking ahead rather than behind.
The MBNA effect
Aside from external issues, there are a handful of important steps Lloyds can take internally that may send share prices rising. The first would be to reveal strong performance from the newly acquired MBNA credit card business. With some 20% share of the domestic mortgage market, there’s little space for substantial organic growth. That’s why the £1.9bn MBNA buy is so important for the bank as it seeks to boost the top line. The credit card industry is growing and offers high margins, so if Lloyds can cut costs and make MBNA even more profitable, expect the market to react well.
Successful cost-cutting is another major action management could take in 2017 that I believe the market would love. Lloyds’ cost-to-income ratio is already lower than most competitors at 47.7% but management will need to continue to cut costs if it wants to improve profitability with interest rates at rock bottom.
One other thing investors should keep in mind is the potential for another special dividend. The latest PRA stress test showed Lloyds’ balance sheet is in rude health, leaving open the possibility of excess capital being returned to shareholders. While Lloyds may offer the best dividend prospects in the domestic banking industry, payout cover remains low and analysts are forecasting falling earnings for each of the next three years.
