I used to be a big, big fan of Lloyds Banking Group (LSE: LLOY). I applauded the sterling restructuring efforts that chief executive António Horta Osório conducted in the wake of the 2008 financial crisis to de-risk the bank and rebuild the balance sheet, work that eventually led to dividend reinstatement back in 2014 and the sale of the final tranche of government shares last year.
Sure, Lloyds still had the problem of legacy issues like the payment protection insurance mis-selling scandal to deal with. But I believed that the more responsible approach to its operations, allied with its key role in the British retail banking sector, made it a great pick for those seeking sustained (if modest) earnings — and thus dividend — growth year after year.
However, all that changed when the UK electorate decided to hit the Brexit button in the summer of 2016. The long-term economic impact of withdrawal from the European Union wasn’t the only thing for the bank to contend with, as the uncertainty around how London’s self-imposed exile from the bloc would play out in the short term also created trying conditions for the FTSE 100 firm.
These troubles are already playing out for Lloyds. Latest data from the Bank of England released this week showed the number of mortgage approvals in the UK dropped to £3.2bn in July, the lowest figure since April 2017. The figures reflect increasing nervousness from homebuyers in the run-up to March’s EU exit date as well as advice from Threadneedle Street that additional interest rate rises could be just around the corner.
And the picture is becoming murkier for all of Lloyds’ lending operations, not just in the mortgage arena where it is the country’s largest loans provider. The Bank of England said that the rate of growth in total consumer borrowing had dropped to 8.5% last month from 8.8% in June, with the amount of new borrowing reversing sharply to £800m in July from £1.5bn the month before. It also marks a severe deterioration from April, with lending last month more than halving from the £2bn forked out three months earlier.
Too much risk
While Lloyds’ results may so far be holding up well — its net income edged 2% higher between January and June to £8.97bn, it advised in early August — signs that the changing economic landscape is weighing on consumer credit doesn’t bode well looking ahead.
Falling lending levels are one thing, but the prospect of a sharp rise in bad loans is quite another. And Lloyds faces both. As my Foolish colleague Rupert Hargreaves recently pointed out, the Black Horse Bank is already feeling the heat here with loan impairment charges leaping in recent months.
City analysts may be forecasting a 64% earnings jump at Lloyds in 2018, but the 2% rise predicted for next year underlines the sharp levelling off in business the bank is expected to endure from 2019 onwards. And things could get a lot uglier should a no-deal Brexit happen.
It may be cheap, Lloyds sporting a forward P/E ratio of just 8.2 times. But I for one believe the bank still carries too much risk today. In fact, I’d be more than happy to sell out of the business given its rapidly-escalating risk profile.
Royston Wild has no position in any of the shares 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.