The Motley Fool

This growing threat could cause the Lloyds share price to crash

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Scene depicting the City of London, home of the FTSE 100
Image source: Getty Images.

At the beginning of August, Lloyds (LSE: LLOY) published its figures for the first half of 2018. 

Investors had plenty to celebrate with statutory profit before tax jumping 23% to £3.1bn and underlying income rising 7% to £4.2bn. The bank also managed to improve its capital position by 121 basis points.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

With the CET1 capital ratio now at 15%, up from 13.5% at the end of Q2 2017, City analysts are getting quite excited about the prospect for additional cash returns. However, while these positive headlines have attracted plenty of attention, there is a worrying trend developing on the Lloyds balance sheet, which could derail the bank’s recovery.

Money troubles

As one of the UK’s four primary banks, and the largest mortgage lender in the country, its balance sheet strength is highly sensitive to the health of the UK economy and consumer.

Since the financial crisis, consumer finances in the UK have only improved as rising wages and record low-interest rates have helped borrowers.

Over the past 12 months, the situation has started to change. Households are now borrowing far more than they can afford as inflation and stagnating wages have eaten away at disposable income. 

According to the Office for National Statistics, last year British households took out £80bn in loans but deposited £37bn with banks. On average, each British household spent £900 more than it received in income throughout 2017.

Lenders such as Lloyds have been more than happy to provide this credit because profit margins on unsecured lending can be in the double-digits. The problem is, consumers have been borrowing more than they can afford, which is why the Bank of England warned lenders last year to rein in credit supply.

Turning bad

Some of these loans are already turning bad. In the first quarter of 2018, Lloyds reported that its loan impairment charge as a percentage of its loan book was 0.12%. Even though this is just a tiny fraction of its overall £40bn unsecured credit book, impairments are multiplying. During the second quarter, they jumped 67% to 0.2%. Management expects the ratio to be less than 0.25% for the full year, which implies further growth throughout the rest of the year.

What concerns me is what the rest of the year might hold. Since the end of the second quarter, the BoE has increased interest rates by 0.25% to 0.75% adding an extra £224 a year in interest costs to a £150,000 variable rate mortgage. At the same time, the rate of consumer borrowing has only intensified. For the year to the end of June, borrowing on credit cards rose 9.5% year-on-year.

Right now, default rates on these loans are low and manageable, and this situation might continue. If Lloyds has been a responsible lender, impairments should never pose a threat to the business. 

However, after being bailed out by the government in 2008 for this reason, the risks of rising loan losses are still fresh in the minds of many investors and analysts.

With this being the case, I believe Lloyds’ share price growth will remain subdued and if impairments expand substantially, it could be time to sell. Personally, despite the potential for additioanl capital returns, I’m avoiding shares in the bank for this reason. 

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic…

And with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be daunting prospect during such unprecedented times.

Fortunately, The Motley Fool is here to help: our UK Chief Investment Officer and his analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global lock-down…

You see, here at The Motley Fool we don’t believe “over-trading” is the right path to financial freedom in retirement; instead, we advocate buying and holding (for AT LEAST three to five years) 15 or more quality companies, with shareholder-focused management teams at the helm.

That’s why we’re sharing the names of all five of these companies in a special investing report that you can download today for FREE. If you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio, and that you can consider building a position in all five right away.

Click here to claim your free copy of this special investing report now!

Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.