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Why Brexit isn’t the only problem for the Lloyds share price

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Hand drawing a red line between the UK and the rest of EU, Brexit concept.
Image source: Getty Images

In recent weeks it’s been impossible to open a newspaper or turn on the TV without being barraged with news on Brexit. It’s not a surprise, as the first stage of European Union withdrawal – that seismic saga that’ll change the political and economic landscape for decades to come – seemingly enters its final stretch.

As I explained in recent days, though, the uncertainty created by Brexit and the subsequent damage to UK business threatens to drag on well into the next decade. And this weighs heavily upon the earnings outlook for Lloyds Banking Group (LSE: LLOY) and its rivals in the financial sector.

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More rate cuts

Still, Brexit isn’t the only shadow looming over Lloyds et al well into the 2020s. However closely aligned a relationship Parliament chooses for the UK with the European Union in a post-Brexit world, interest rates are likely to remain at rock-bottom lows, heaping further doubt on profitability levels for the country’s banks.

As I’m sure you know, rates across the world’s central banks have been held at or around record lows since the 2008–09 financial crisis, keeping the lid on returns across the banking sector. This explains in large part the underwhelming share price performance of Lloyds and its peers long before preparations for EU withdrawal began in the summer of 2016.

However, with lawmakers across the globe hacking down lending rates again and/or in addition to other forms of monetary easing as the macroeconomic slowdown worsens, it seems likely that the Bank of England might have to respond in kind. The benchmark rate currently sits just 50 basis points off the record low of 0.25%.

But of course the level of future rate cuts does depend on how severe Brexit-related uncertainty becomes. Just last month, Monetary Policy Committee member Michael Saunders commented that “[even] if the UK avoids a no-deal Brexit, monetary policy also could go either way and I think it is quite plausible that the next move in the bank rate would be down rather than up.”

Toughening competition

Aside from the broader UK economic outlook, though, Lloyds faces additional top-line pressure because of mounting competition in the banking sector.

The traditional big beasts are having to fight dirty to win business and to handicap the charge of the challenger banks, and this is no more so than in the mortgage market. For Lloyds, as the country’s biggest home loans lender, this is a particularly huge problem.

Data from Mortgage Brain illustrates the extent of the problem with a further erosion in borrowing costs. Over the past 12 months those homeowners taking out a £150,000 loan on a two-year deal with a loan-to-value of 60%, 70%, or 80% would enjoy savings of between £234 and £396 a year, the firm noted.

Just a moment ago Lloyds’ share price was recently at 61p, meaning that the bank boasts a low forward price-to-earnings ratio of 8.2 times and a giant 5.5% dividend yield. But not even these attractive paper readings are enough to encourage me to invest given the long-term risks facing the bank, Brexit and otherwise. I’m happy to continue avoiding it.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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