Shares in Lloyds Banking Group (LSE: LLOY) stand at 67p as I write, putting them on a P/E based on expectations for the year ended December 2016 of only 9.5 — results are due on 22 February, and as a shareholder I’ll be scouring them carefully.
Analysts are expecting an EPS fall of 17%, followed by drops of 3% and 6% for this year and next. But even then we’d still be looking at a P/E of only a bit over 10 on 2018 forecasts. That’s way below the long-term FTSE 100 average of around 14, even though Lloyds is forecast to deliver a dividend yield of 6% by then, around twice the FTSE 100 average.
A jump to 100p per share would take the P/E to 15 and the dividend to 4%, and if Lloyds gets back to earnings growth by 2019 then I’d see that as an undemanding valuation. What’s keeping the price low today and what would it take for a revaluation?
Government sell-off
Firstly, there’s the overhang of taxpayer-owned shares being sold in tranches, with the tendency to soak up demand and keep prices down. But that should be over within the next few months as the government is in the process of selling off what’s left.
Then we have the prospect of those EPS falls forecast for the next few years. It comes at a time when earnings at Barclays look set for a rebound. There’s an 18% fall on the cards for Barclays in 2016, but analysts are expecting growth of 44% in 2017, followed by 18% in 2018 — and by then, the two banks’ shares would be on the same P/E rating.
Barclays has undergone some radical restructuring and has slashed its dividend, so there are fears that Lloyds might have to do something similar. But we need to consider the different markets of the two banks — Lloyds is already a UK-focused retail bank and we really shouldn’t want any change in that, while Barclays has been unravelling its tentacles from all sorts of business to refocus on becoming more of a transatlantic operation.
Are dividends reliable?
Will Lloyds need to at least freeze its dividend? An update on dividend policy with 2016 results will be welcome, but I expect the progressive approach to stick. I’d actually be happy if payments were held at the expected 2016 yield of 4.4% for a couple of years, but that could damage confidence as the suspended dividend was only reinstated as recently as 2014.
Reported earnings could be pivotal, too. If there’s any notable deviation either side of forecasts, I could see that triggering a rerating — and I see the bearish side being potentially more fierce should earnings fall short. At this late stage, mind, I’d be surprised if the City is not close to the mark.
Jenga collapse?
The biggest factor keeping Lloyds shares depressed is Brexit, and the massive uncertainty that brings to the the banking sector in general.
Last month, HSBC chairman Douglas Flint suggested Brexit could lead to a “Jenga tower” collapse of jobs in the UK banking industry, a comment with which Bank of England Governor Mark Carney concurred — although Mr Carney did add that he saw greater short-term risks for the financial system in continental Europe than in the UK.
We’re sailing into dangerous waters, and I don’t think we’ll see Lloyds shares getting back above £1 until we know the shape of our post-Brexit financial markets. But I’m in no rush.
