I used to be a big, big fan of Lloyds Banking Group (LSE: LLOY). I applauded its restructuring efforts in the wake of the 2008/09 financial crisis, measures which enabled it to rebuild the dividend and make its operations much less risky, as well as its dominant position in the robust UK retail banking sector. My viewpoint changed on the morning of June 24 2016 though, when the British electorate chose to leave the European Union.
The bank’s share price tanked in the immediate aftermath of the vote as investors digested what this would mean for Lloyds’ bottom line, and while it recovered much ground in the following months, 2018 has been a nightmare for the share price as the planned departure date in March has drawn closer.
Lloyds’ market value has fallen 25% in the year to date, and I’m predicting that it could continue to slide in 2019.
No-deal Brexit
According to recent government guidance, the UK is set to take an economic hit however Parliament negotiates our withdrawal from the European bloc. What’s particularly terrifying though, is that forecasters suggest that domestic GDP could be a whopping 9.3% smaller in the event of a no-deal Brexit.
Unfortunately news flow from both London and Brussels in recent days is suggesting that this potentially-catastrophic scenario could be closer to reality. The situation is grave, and according to a cluster of business groups this week, UK firms are “watching in horror” as the crisis unfolds. They commented in a joint statement that “with just 100 days to go, the suggestion that ‘no-deal’ can be ‘managed’ is not a credible proposition… there is simply not enough time to prevent severe dislocation and disruption.”
A worsening mortgage market
The strain created by Brexit has become ever more problematic for Lloyds and its peers as 2018 has progressed, and this was evident in its most recent trading details when news of stagnating revenues and a spike in bad loans over the past few months emerged.
And recent data from Moore Stephens will come as particularly chilling news for Lloyds given its position as the country’s biggest mortgage provider. The accountancy and advisory firm estimates that the value of residential mortgages written off by UK banks and building societies jumped 58% in the year to June, to £122m, the first increase since 2013/14. It warned that additional interest rate rises in the months ahead could generate even more write-offs too.
Dividends in danger?
Despite these dangers, Lloyds remains a popular pick with income investors owing to its gigantic yields. According to the City, shareholder payouts of 3.3p and 3.5p per share are on the cards for 2018 and 2019 respectively, projections that yield a monster 6.5% and 6.9% respectively.
But given the weakness of the bank’s balance sheet (at least according to the European Banking Authority), as well as its uncertain profits outlook, I believe Lloyds is in danger of missing next year’s dividend forecasts and bring the curtains down on its progressive dividend policy. This would obviously have a catastrophic effect on the Footsie firm’s share price.
All things considered, I think Lloyds carries far too much risk right now, for both growth and income investors. It’s a stock that should be avoided or sold without delay, in my opinion.
