Lloyds Banking Group (LSE:LLOY) suffered a humiliating and potentially brand-damaging start to the New Year. It endured an IT glitch that locked customers out of their accounts for over eight hours on New Year’s Day. This also affected customers of Halifax and Bank of Scotland, which are also part of the group.
On January 2, Travelex, a foreign exchange company, had to take its site offline to deal with a cyber-attack, which affected its customers including HSBC, Barclays and Sainsbury’s Bank.
Although a company spokesperson for Lloyds confirmed a cyberattack wasn’t the cause of its own outage, both these incidents affecting the banking sector in quick succession again highlighted the vulnerabilities faced by big business’s reliance on IT.
Share price fluctuations
Throughout 2019, the Lloyds share price had endured a volatile time, dropping over 27% between April and August. This was in part because of an influx of last-minute PPI claims as the PPI deadline approached.
Yet despite facing a series of troubles, the value of Lloyds shares rose later on to end 2019 22% up, boosted by December’s Conservative election win.
Positive sentiment surrounding the Brexit divorce has seen a break in the clouds over the banking sector and contributed to the recent rise in Lloyds share price.
It now has a price-to-earnings ratio (P/E) of 11.5 and earnings per share are 5.5p, but these financial metrics point to the Lloyds share price being undervalued at today’s levels and besides this, it offers a very attractive 5% dividend yield going forward.
Continued uncertainty
Lloyds is one of the most profitable large banks in Europe, but it doesn’t do much business outside the UK. Although this may seem to mean that Brexit shouldn’t affect it too badly, it has a significant retail focus, so if Brexit causes a downturn in the UK domestic economy, then it could be at risk of another share price decline. It also has a very high debt ratio of 94%, which although similar to other UK banks, is nothing to boast about.
When I wrote about the FTSE 100 firm at the beginning of December, I expressed my reservations considering the UK political climate and signs of a global slowdown along with the very low UK interest rates, possibly set to go lower.
The world is currently in a heightened state of alert since the US killed top Iranian general Qasem Soleimani. This (and increasing concern over global cyber threats that make banks a prime target) adds to the risk surrounding this sector.
Until Brexit is concluded I still feel that the banking sector is one to avoid. Although I see the appeal in Lloyds’ relatively low P/E and the dividend that is covered twice by earnings per share, I think the uncertainty ahead still makes this a risky share purchase.
