The banking landscape has transformed in recent years. Retail banks are no longer such a common sight on the high street and a regular visit to your local branch manager is out of the question. These days banking is mainly done online or over the phone.
Lloyds Bank (LSE:LLOY) is no different and its share price partly reflects that these changes have not generated a positive outcome for one of the sector’s big names.
Digital demons
Several ‘challenger banks’ have popped up to confront traditional banks. Mainly stimulated by the rise of the internet, these digital banks are competitive on price and service, which leaves big banks like Lloyds with little room for manoeuvre.
Despite the PPI mis-selling disaster being put to bed, Lloyds still has many hurdles to contend with in 2020. The share price is down 2.25% in the past year. That’s not a lot, but the share price has seen considerable volatility too. Year-to-date, it’s down over 11% and that’s only a matter of weeks into the year. Unfortunately, I think the share price has further to fall.
Brexit is likely to throw up a multitude of challenges in the coming months as the UK negotiates new trade deals with the EU prior to a complete and final break up at the end of the year. The ongoing uncertainty of Brexit will continue to weigh heavily on Lloyds until it concludes. A good trade deal would massively change the outlook for the banking sector, but little can be predicted and worries about a potential market crash are also playing on shareholders’ minds.
Interest rates and inflation have been low for some time and this is unlikely to change in the near term. Our slowing economy doesn’t do the banking sector any favours either.
Too little too late?
Lloyds is 255 years-old but is making strides toward a digital future. However, converting legacy systems into sleek, fast, modern systems is no small undertaking. This is where challenger banks have an edge and less expenditure.
Lloyds has also announced it intends to close 56 branches between April and October in another cost-cutting bid.
It’s not all bad news though. The Bank of England recently undertook a stress test to assess the health of UK banks. This test found that the top banks, including Lloyds, are adequately prepared to withstand another financial crisis such as a Brexit-induced economy meltdown or a major global recession. But while this is reassuring to its customers, it wouldn’t come without cost to shareholders.
So, what would I do about the Lloyds share price right now? I’d continue to avoid it. I agree it looks good on paper, with a price-to-earnings ratio of 10 and a generous dividend yield of 5.7%, but I still think the uncertainty surrounding the economy makes it too risky.
There are many more desirable UK stocks in the FTSE 350 to choose from. I think there’s bearish sentiment towards big banks for good reason and I’d seek out safer sectors to invest in.
