The Lloyds (LSE: LLOY) share price first recovered to 67p as soon after the financial crisis as April 2009. It’s since made some big swings both above and below that level, as sentiment has waxed and waned. But nine years on we’re at 67p today. Could 2018 be the year that the Black Horse finally gallops back above the 100p level it fell through in the winter of 2008?
Cheap earnings multiple
Lloyds is certainly in far better shape than it was in April 2009. It’s statutory pre-tax profit of £5.3bn in 2017 was at a level not seen since 2006, making it a landmark year for the bank. Back in private ownership, with dividends rolling and also a strong performance reported in the first quarter of this year, surely the shares should be heading north of 67p?
According to the Reuters consensus of analysts’ forecasts, Lloyds will post earnings per share (EPS) of 7.69p for 2018, putting the stock on a price-to-earnings (P/E) ratio of 8.7. This compares with 13.4 for HSBC at a share price of 733p (as I’m writing) and a consensus EPS forecast of $0.74 (54.8p at current exchange rates). If the market were to re-rate Lloyds to the same earnings multiple as HSBC, the Black Horse’s shares would trade at 103p.
UK economy
Remarkably, Lloyds trumps HSBC on the major measures of operating efficiency and profitability. Usually, the market rewards such superiority with a higher rating. However, other factors are also in play.
Notably, HSBC is a geographically diversified global giant, while Lloyds is a big fish in a small domestic pond, with its fortunes tied to the UK economy. This week the Bank of England slashed its UK economic growth forecast for 2018 to 1.4%, from 1.8%, and kept interest rates at 0.5%, as a result of a slew of weaker-than-expected economic data, including GDP growth of just 0.1% in the first quarter.
Rising interest rates are generally good for the profitability of banks because the spread between the money they borrow and the money they lend increases. The prospect of lower-for-longer interest rates in the UK doesn’t do Lloyds any favours. Furthermore, while the weaker-than-expected economic data may be a temporary soft patch, it’s possible that we could be heading into a more serious downturn.
Other factors
Also this month, one of the key architects of the UK’s post-2008/9 financial regulation warned that leverage in the British banking system is still “dangerously high.” Criticising a host of things, from levels of capital and the efficacy of stress tests, to dividends and share buybacks, Sir John Vickers also suggested that ‘bail-in’ plans to avoid a taxpayer bailout in a crisis are inadequate. “I don’t think we can rely on it in a crisis and if we had another systemic crisis anything like the last one, goodness knows what would happen,” he said.
With Brexit uncertainty and PPI claims also likely to remain something of a thorn in Lloyds’ side until the deadline of August 2019, there are plenty of factors that could keep market sentiment towards the bank depressed and the share price below 100p in 2018. I’m avoiding the stock for the time being.
