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The Lloyds share price has slumped 25%! 3 reasons why I think it’ll keep sinking

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Are there any greater gluttons for punishment than buyers of banking stock?

Let’s consider investors in Lloyds (LSE: LLOY), for example. They’ve endured a whopping 25% slump in the value of the stock in just three-and-a-half months, taking it to levels not seen since late 2018. And there are some big reasons why I believe investors should brace themselves for further falls.

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Battle of Britain

Lloyds’ dependence upon a strong British economy means that it has an almighty battle on its hands to prevent profits sinking, as a study just released by The Resolution Foundation indicated.

According to the think tank, those on low and middle incomes are more vulnerable in the event of a recession than they were before the financial crisis more than a decade ago, reflecting the sluggish pay growth of recent years and a lack of decent savings.

So what does this mean? Well, Lloyds is already struggling under the weight of Brexit uncertainty — revenues slipped 2% in the six months to June while bad loans surged 27%. Heaven knows how badly it would suffer should the UK embark on a no-deal withdrawal from the EU, given the likelihood of the economy slipping into prolonged contraction as a result.

PPI bills swell

Those income and impairment numbers weren’t the only ones to rock The Black Horse Bank in the first half. With the August 28 deadline for PPI-related claims fast approaching, the business booked another £550m charge for the second quarter, soaring from the £100m set aside in quarter one and taking the total charge above the £20bn milestone.

Lloyds confessed that the level of claims volumes had taken it by surprise, rising to around 200,000 per week recently. This is around three times the number of applications that it’s historically been used to handling. Another unexpected, profits-denting claims surge for the third quarter is not out of the question, and thus investors should be braced for another share price fall when the next update materialises.

There are better buys out there

With profits at Lloyds on the back foot — pre-tax profit ducked 7% for January-June to £2.9bn — why not buy other FTSE 100 shares right now?

The UK’s premier share index is packed with companies that report in dollars and euros, firms which are likely to receive an additional boost to profits in the months (and possibly years) ahead from an already-sinking pound.

Or how about buying into some classic defensive shares like utility provider National Grid or weapons specialist BAE Systems, for example? Brexit isn’t the only worry for share investors, of course, and with trade talks between the White House and political leaders in China and Europe worsening, demand for safe-haven companies like those mentioned above could really heat up.

If you’re determined to grab a slice of the banking sector, however, I would argue that buying non-UK-focused banks like Santander and HSBC is a much better decision than snapping up Lloyds. I recently praised Santander because of its excellent emerging markets exposure, and the same quality makes the latter a brilliant stock to pile into, as results released today showed — an 8% revenues rise in the first half helped pre-tax profits at the bank soar 18% year-on-year.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings and 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.

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