Chancellor George Osborne peppered last week’s (politically disastrous) Budget with dire warnings of global economic storms ahead. He was trying to get his excuses in early but the clouds are undoubtedly gathering as central bankers repeatedly jab the stimulus button without hitting escape velocity.
Home groan
The Office for Budget Responsibility (OBR) has just hacked back its growth forecasts. In November, it said the economy would grow 2.4% this year, but now predicts just 2.0%, with similar downward revisions for the subsequent four years. The worst of the storms may originate from overseas but as these figures show, investors hoping to escape by investing in domestic-focused stocks such as high street bank Lloyds Banking Group (LSE: LLOY) may also get drenched.
Lloyds has pulled out of a string of overseas territories to concentrate its efforts on becoming a UK-focused, multi-brand bank targeting the retail and SME markets. With the UK growing faster than any other leading economy, that move has paid off so far. It has helped Lloyds avoid the Asia meltdown afflicting HSBC and Standard Chartered, and the investment banking malaise at Barclays.
Bubble trouble
It should also help Lloyds’ bosses rebuild the bank’s reputation as a low-risk income machine, but also leaves it exposed to troubles on the home front. Bad debts at the bank have been remarkably low for some time, as low interest rates sustain borrowers, but this has also lured Britons into yet another borrowing spree. Households are expected to spend £58bn more than they earn this year, rising to £68bn by the end of the decade, which is “unprecedented”, the OBR has just warned. Many younger mortgage borrowers will never have seen interest rates rise. It might come as a shock.
I’m concerned about a UK housing bubble, as young people can no longer afford to buy despite record low mortgage rates. Prices are now being propped up by the Government, through the Help to Buy Isa and now the new Lifetime Isa. The mortgage and property industry insists that growth is steady and sustainable, but they say that in the run-up to every bust! The Chancellor’s crackdown on buy-to-let could trigger the next one.
Lloyds faces other potential threats, with the new breed of challenger banks snapping at its heels by offering market-leading savings and mortgage rates. These are small fry for now – Virgin has only a 3.4% share of the new mortgage market – but if the challenge grows, it will further squeeze margins.
Lucky numbers
Share price performance has been disappointing lately. Trading at 69p, Lloyds is well below its 52-week high of 89p. Other numbers look more promising, with the stock trading at just 8.15 times earnings and on a forecast yield of 5.9% for December.
It’s finally shedding the PPI scandal and boasts a strong balance sheet with a common equity tier 1 ratio of 13, while the underlying return on equity was 15% last year. It also arranges one in four first-time buyer mortgages, locking in the next generation of banking customers. Lloyds continues to sail in the right direction but global storms could still throw it off course.
