It’d be a stretch to claim that markets are in raptures following last week’s European Union summit which eliminated the possibility of the UK falling off the Brexit cliff-edge on Friday. Sterling’s pop in end-of-week trading does show, though, that traders and investors are breathing a huge sigh of relief that a no-deal exit has so far been averted.
Let’s not get too excited, though. The EU27 leaders may have given Parliament some space to create a palatable British withdrawal which minimises the economic impact of leaving the club, but there’s no guarantee that lawmakers will be able to make the most of this opportunity.
MPs are still unable to agree on what kind of Brexit we should embark on, almost three years after the referendum over our EU membership was held. An extension of Article 50 by just two additional weeks, to April 12 — provided that Theresa May’s meaningful vote III falls again next week, that is — doesn’t mean that Parliamentarians will get any closer to striking an agreement.
Lloyds in danger?
A no-deal scenario is still very much on the table, then, and this makes Lloyds Banking Group (LSE: LLOY) a risk too far at the current time. The Bank of England famously predicted in the autumn that GDP would take a hit to the tune of 8% in the event of a disorderly withdrawal, bringing the threat of a surge in bad loans as well as sinking revenues to the banking sector.
It’s worth remembering that the outlook for the FTSE 100 bank is pretty grim however Britain exits. Even if the Commons can construct an EU exit with a deal in the spring, this bodes badly for the UK-focussed banks as the domestic economy is likely to suffer under all possible Brexit scenarios.
Let’s say that Lloyds and its peers receive a stay of execution, though, and that political manoeuvring in Westminster, i.e. through the declaration of a general election or even a second referendum, leads to Britain embarking on a much longer extension to Article 50 possibly to the end of 2020.
Well the prospect of extended uncertainty over Britain’s relationship with the European Union can be exceptionally damaging as well, as Lloyds showed in its full-year results last month. Impairments at the bank jumped 18% in 2018, to £937m, as broader economic activity slowed. Net income steadily eroded in the second half of the year and, in the fourth quarter, actually stagnated on an annualised basis at £4.3bn.
Too much worry
And things could go from bad to worse for Lloyds. The prospect of a struggling economy means hopes of further Bank of England rate rises have also gone up in smoke, providing another smack to the bank’s profits picture. And on top of this the Black Horse Bank is battling a sharp uptick in PPI-related penalties ahead of this summer’s claims deadline.
For these reasons I’m happy to ignore Lloyds’s low valuation, a forward P/E ratio of 8.2 times, as well as its bulky 5.6% dividend yield. It’s a share in danger of sinking in 2019 and, for this reason, I’m giving it a wide berth.
