It seems as though the news for Lloyds Banking Group (LSE: LLOY) and the rest of the FTSE 100 banks is worsening by the day.
City analysts are understandably pretty bleak about the UK economy following the Covid-19 shock. The possibility of a no-deal Brexit at the end of the year casts a dark shadow over possible growth through to the end of decade, too. Economic news flow continues to paint a brutal picture and suggest that a prolonged period of GDP weakness is ahead of us.
A sea of woe
Manufacturing and services PMI data released today are the latest gauges to shake confidence. While off recent lows, the May manufacturing gauge still came in at an insipid 40.6. Things remain even worse for the critical services sector, a segment responsible for more than four-fifths of British GDP. The reading here for this month came in at 28.7. Hopes of a so-called V-shaped economic recovery seem to be receding with each new headline.
This isn’t the only news to rock Lloyds in recent days, however. Bank of England policymakers have recently raised the prospect of additional rounds of monetary easing to soothe the economic crisis. And the idea seems to be gaining traction, too. Bank governor Andrew Bailey has just told MPs that negative interest rates were now under “active review”.
Profit levels at Lloyds and its industry peers have been suffocated under the weight of ultra-loose monetary policy since the 2008–09 banking meltdown. It explains why the firm’s share price gains between 2010 and 2020 were roughly half of those printed by the broader FTSE 100. And it looks like things will be even tougher for the so-called Black Horse Bank during the 2020s.
Look past Lloyds
The extent of the storm coming Lloyds’s way cannot be accurately predicted, of course. The rate at which lockdown measures in the UK will be rolled back as infection rates climb remain anyone’s guess. Meanwhile speculation is growing over a possible ‘second surge’ in Covid-19 cases later in 2020.
It’s clear though that Lloyds is bracing itself for a storm. Last month it set aside provisions of £1.43bn largely to cover the economic cost of the coronavirus crisis. It advised that its operations would “inevitably be impacted both within the existing book and potentially in the new lending we are undertaking to support our customers”.
The Lloyds share price has fallen almost 50% in the past few months as economic fears have worsened. But the bank hasn’t become any more appealing from a value perspective. City analysts have been scrambling to downgrade their earnings estimates – consensus is now suggesting a 38% dive in annual profits in 2020 – and so the bank now trades on a forward price-to-earnings multiple of around 13 times, way above its more-recent ratings of below 10 times. With the business also pulling its dividend, there seems to be a hell of a lot of risk right now with very little reward. I’d avoid the battered blue chip at all costs.
