Has Brexit smashed Lloyds Banking Group plc’s exceptional dividend forecasts?

The fallout of June’s Brexit referendum continues to batter the banking segment, with further losses printed across the segment in Wednesday trade.

Lloyds (LSE: LLOY), for one, has been dragged to its cheapest since April 2013 at 50.4p per share as of the time of writing, meaning the stock has shed almost a third of its value since 2016 kicked off.

Concerns over the strength of Britain’s banks have long been doing the rounds, although Lloyds has avoided the worst of sinking investor appetite thanks to promises of bubbly dividends. Indeed, the City has chalked-in dividends of 3.8p and 4.1p per share for 2016 and 2017, respectively, figures that yield a terrific 7.6% and 8.1%.

Bank steps in

But stock pickers are becoming increasingly concerned over these projections. And the Bank of England’s intervention yesterday would have done little to assuage such fears.

‘The Old Lady of Threadneedle Street’ sought to shore up the banking industry on Tuesday by cutting the counter-cyclical capital reserves needed to be held by the likes of Lloyds, to 0% from 0.5%. These measures will “[raise] banks’ capacity for lending to UK households and businesses by up to £150bn,” the bank said.

However, the Bank of England fired a warning over how the banking sector chooses to use this greater capital flexibility. Indeed, the Financial Policy Committee said that it supports the expectation of the Prudential Regulatory Authority board “that firms do not increase dividends and other distributions as a result of this action.”

This could prove a decisive development for those hoping for Lloyds to hike 2015’s total dividend of 2.25p per share.

Self-help star

Many commentators believed that Lloyds was on course to shell out handsome rewards to shareholders following the self-help actions of recent years.

The company’s Simplification scheme has worked wonders in streamlining the group and taking the hammer to Lloyds’ cost base. These measures have transformed Lloyds’ balance sheet, and a subsequent CET1 ratio of 13% times as of March is one of the best in the industry.

Meanwhile, the bank’s dependence on the stable-but-unspectacular British high street provided Lloyds with terrific earnings visibility, a critical quality for dividend chasers.

Brexit pains

But the results of last week’s referendum have very much changed the game. Aside from the Bank of England’s comments on Tuesday regarding future dividends, Lloyds is at the mercy of a significant cooldown in the UK economy, a situation that could deliver a hammer blow to revenues in the years ahead.

And in particular, the Black Horse bank’s position as the biggest residential lender leaves it in severe danger should the domestic housing market crash.

Britain’s central bank also advised that “there is evidence that some risks have begun to crystallise,” advising that that “the current outlook for UK financial stability is challenging.”

Against this backcloth, I believe that Lloyds is in serious danger of not meeting the City’s bullish dividend forecasts.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.