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Should you ditch Lloyds Banking Group plc before next week’s results?

Embattled British bank Lloyds (LSE: LLOY) is due to release its latest set of quarterlies on Wednesday, 26 October. And most market commentators believe the release will make for grim reading.

The ‘Black Horse’ bank has shed a quarter of its value since British voters decided to leave the European Union in June, and with good reason — quite how Lloyds will generate revenues growth in the years ahead, as severe economic cooling appears on the cards from 2017, and with it a backcloth of ultra-low interest rates, remains the subject of much head-scratching.

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Economy slumping?

The Bank of England’s latest ‘Credit Conditions Review’ this month certainly gave cause for stakeholders in Britain’s banks to be concerned.

The report noted that

secured credit demand for house purchase fell significantly in the three months to mid-September

adding that

major UK lenders reported that the fall in demand was likely to have been driven by temporary factors that led borrowers to defer mortgage applications, particularly the outcome of the UK referendum on membership of the EU.”

As the UK’s largest residential mortgage lender, a prolonged deterioration in homebuyer appetite could take a large chunk out of Lloyds’ top line. Indeed, a separate report from the Bank of England last month showed the number of mortgage approvals sinking to 21-month lows in August.

But this is not the banking sector’s only worry. Indeed, the Bank of England also warned that “demand for credit from businesses weakened across all business sizes in quarter three.”

As well as the pressures created by Britain’s muddled EU withdrawal, the likes of Lloyds are also being battered by the rise of ‘challenger’ banks stepping up to lend to business. Just last week Redwood Bank was the latest in a string of new institutions to apply for a UK banking licence.

PPI problems

On top of fears that Lloyds’ statement may reveal a sharp economic deceleration, investors are also sweating over another huge hike in what the firm set aside to cover the long-running PPI mis-selling scandal.

Indeed, the boffins at UBS have factored in an £800m charge for the July–September period, while recent media reports also suggest an oncoming storm for Britain’s banks. Just last week Sky News reported that executives at Lloyds, RBS, Barclays and HSBC are bracing themselves for a collective £2bn hit for the third quarter.

Lloyds has been by far the worst culprit on the PPI front, and so far set aside £16bn to cover the cost of the scandal. And the FCA’s decision to put back a proposed claims deadline to mid-2019 is likely to keep the colossal bill ticking higher for some time yet.

While many would argue that the economic and legacy risks facing Lloyds are currently factored into the share price — the financial giant currently deals on a P/E ratio of just 7.6 times — I would expect the sellers to come out in force again should third-quarter numbers be worse than even the most sombre of forecasts.

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

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