Over the last year, I’ve gone against the herd and remained determined to avoid Lloyds (LSE:LLOY) shares. A poor outlook for the UK economy and falling interest rates are a couple of the reasons why I’ve stayed away. But that’s not all.
The FTSE 100 bank faces other considerable threats in the near-term and beyond. And two of these have increased significantly in recent days and weeks: rising competition from challenger banks, and thumping mis-selling costs for previous car loans.
These could create further problems for Lloyds’ sinking share price. Here’s why…
1. Fresh car crash?
Lenders have received much-needed clarification on the costs they can expect from mis-selling motor finance in the past. On Monday (30 March), the Financial Conduct Authority (FCA) said banks will pay a total of £9.1bn to draw a line under the saga.
The decision means Lloyds is unlikely to raise its provisions related to the FCA case. Earlier hikes last year weighed on the bank’s share price. What’s more, that £9.1bn cost figure is roughly £2bn lower than that the watchdog had previously tipped.
But lenders can’t breathe a sigh of relief just yet. Why? Well claimants will be paid on average £829 in damages, which is well below the £1,500 figure that a Fair Banking all-party parliamentary group put forward last year.
It raises the threat that swathes of aggrieved customers will reject the FCA’s decision and take Lloyds and its peers to court. With more than 12m people said to eligible for compensation, that leaves a lot of scope for worse-than-expected costs, not to mention more prolonged uncertainty that could weigh on Lloyds’ shares.
2. Challengers raise the stakes
As I’ve said, declining interest rates are a big threat to banks’ profits. They reduce net interest margins (NIMs), and leave the likes of Lloyds in danger of the mediocre growth delivered in the 2010s.
The problem is that NIMs are already in peril as challenger banks ramp up their attacks. With their strong digital platforms and expansions into other products, the dangers to traditional banks’ income and margins are huge.
The threat ramped up a notch this week too, with Wise joining the likes of Monzo and Starling in offering customers current accounts. Revolut has also joined the club in recent weeks after receiving a full UK banking licence.
RFI Global estimates the Big Six banks’ market share has slid 14% in just six years, to 71%. It’s a worrying trend that looks set to continue.
Final word on Lloyds
Despite the bleak picture I’ve painted, Lloyds has several big things going for it. A trusted brand that could help it hold its own against the challengers. Robust positions in long-term growth markets like mortgages. And a robust balance sheet it can deploy for both growth and shareholder dividends.
But considering the broader economic picture, not to mention the industry-specific threats it faces, I’m happy to give Lloyds shares a miss right now.
