The Motley Fool

Lloyds Banking Group plc has flatlined in Q3. Can it finish with a flourish?

The resilience of Lloyds’ (LSE: LLOY) share price as we enter the latter half of Q3 has been pretty remarkable.

At first glance, the banking goliath’s performance may not be anything to write home about — Lloyds’ stock value has fallen 0.4% since the close of June. By comparison the FTSE 100 has advanced 6% in the quarter to date, and visited 15-month peaks above 6,940 points just last week.

But Lloyds’ earnings outlook has changed considerably since the UK voted for Brexit, a factor that leaves the bank dealing at a 25% discount to pre-referendum levels, and that has pushed the stock to its cheapest since spring 2013 in early July.

Economic threats

While I believe the FTSE 100’s strong international bias may help to keep it afloat in the coming months, I’m not so optimistic over Lloyds’ share price prospects.

Massive restructuring in the wake of the 2008/09 global recession, and with it a renewed focus on the British retail banking segment, made Lloyds a great pick for those investors seeking solid-if-unspectacular earnings growth.

However, these intended derisking measures have ironically hiked Lloyds’ risk profile by a significant degree since June’s vote was held.

Indeed, Barclays Capital has noted that “an uncertain UK economic outlook post the EU referendum continues to weigh on expectations and we anticipate weakening earnings from a pick-up in credit costs, slowing activity levels and some margin pressure beyond this year.”

Not only is Lloyds under threat from severe economic contraction — indeed, Barclays Capital expects Britain to enter a technical recession by the close of the year, and have pencilled-in a 0.5% decline in 2017 — but the Bank of England is likely to keep interest rates around record lows to prevent the economy flatlining.

The current benchmark rate of 0.25% is predicted to fall again by the end of 2016 by many economists, a situation that would heap further pressure on Lloyds’ profit outlook.

Flaky forecasts

And the City shares my pessimistic view on the bank’s earnings outlook in the near-term and beyond. Brokers have been taking the hatchet to their forecasts in the weeks following the referendum, and Lloyds is now expected to see the bottom line fall by 15% in 2016 and 13% in 2017.

Some would argue that subsequent P/E ratings of 7.4 times and 8.5 times for this year and next still make the stock an attractive pick, however.

I firmly disagree, given that Lloyds can’t fall back on foreign marketplaces to generate growth as the British economy stalls. And of course the enduring and costly PPI mis-selling scandal — a saga that looks set to stretch until 2019 at the earliest — adds another layer of risk to the bank.

With economic indicators likely to disappoint in the weeks and months ahead, I reckon there’s plenty of scope for Lloyds’ stock price to sink sharply again.

Be brave and keep buying

But I believe there's still plenty of opportunity for savvy stock seekers to make a fortune despite Lloyds' troubles. After all, with volatility comes opportunity.

With this in mind, The Motley Fool's analysts have written Brexit: Your 5-Step Investor’s Survival Guide, a step-by-step report to help you capitalise on current market uncertainty and make a fortune.

Click here to download your copy of this EXCLUSIVE report. It's 100% free and can be sent straight to your inbox.

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.