It would be fair to say that shares in Lloyds (LSE: LLOY) have struggled this year. After charging to a five-year high of 89p during 2015, Lloyds’ share price has since collapsed by around 40% from that five-year peak.
There are a number of reasons why investors have turned their backs on it over the past 12 months. First off, during the second half of 2015 and the first few months of 2016, the City began to express doubts about Lloyds’ ability to continue growing in the UK’s increasingly competitive retail banking market. Then, on 23 June the UK voted to leave the EU and shares in Lloyds dived as investors entered risk-off mode, selling shares and buying safe haven bonds.
Lloyds has since responded to some investors’ post-Brexit concerns by announcing a renewed cost-cutting drive. As announced last week, management is planning to cut a further 3,000 jobs and shut 200 more branches as part of its long-term plan to reduce costs. These actions should help the group shave a further £400m from its cost base, increasing overall cost reductions to £1.4bn by the end of next year.
These cost cuts should offset some of the post-Brexit sales declines but as of yet, it’s unclear how long any post-Brexit slump will last—if there is one!
A sector-wide problem
Shares in Lloyds have underperformed the wider FTSE 100 since the end of June, but investors shouldn’t view this as a company-specific matter. Almost every single Eurozone bank has seen its shares underperform the relative index so far this year as concerns about the health of the sector grow.
It seems these fears about the Eurozone banking system have dragged down shares in Lloyds, despite evidence that shows the bank is one of the strongest financial institutions in Europe.
Indeed, the results of the recent European Banking Authority stress test indicate that under stressed conditions, Lloyds’ Tier one capital ratio would fall by around 3%, which is one of the smallest declines of the 51 banks tested.
So, it’s clear that Lloyds is a strong bank that should be able to weather any adverse economic conditions. Unfortunately, as concerns about the state of the European banking sector continue to hang over the industry, it’s unlikely shares in Lloyds will be able to recover to their five-year highs printed last year. Nonetheless, over the long term Lloyds should be able to continue to outperform its peer group and this should be reflected in the share price.
Look to the long term
Trying to predict the price of Lloyds’ shares three, six or even 12 months out is a near impossible task but over the long term, the bank’s fundamentals should shine through.
Investors shouldn’t worry about the short-term performance of shares in Lloyds. Shares in the bank currently trade at a highly attractive forward P/E of 7.3 and support a dividend yield of 6.5%. City analysts expect the bank’s earnings per share to fall by 14% this year and a further 11% for 2017.
