Times are tough for UK-focused banks like Lloyds Banking Group (LSE: LLOY) right now. The economy is growing at its slowest pace for more than 10 years, official data shows, and it looks like the banking sector is sailing into a storm as we enter 2020.
Forecasts predict that Lloyds’ earnings will fall 2% next year, though it’s possible that the bank will have to endure an even larger reversal. So forget about the FTSE 100 firm’s low forward P/E ratio of 8.3 times and huge 5.8% dividend yield, I say. Here are three reasons why its share price could sink again in 2020.
Interest rate cuts
A year ago, many were suggesting that it was a question of when, rather than if, the Bank of England would raise interest rates again after hiking the benchmark to 0.75% a few months earlier. The steady slowdown in the UK economy has put paid to these hopes, however, and instead speculation is increasing that rates will start falling again.
The last time the Monetary Policy Committee got together, two members of the nine-strong committee voted to pull the rate back towards the record lows of 0.25% again. This was the first time that policymakers were split for almost a year-and-a-half and underlines the shift in Bank of England thinking.
Another worry for Lloyds and its investors in 2020 is intense competition in key product categories. Those ultra-low interest rates mean the UK’s long-established banks are getting more and more desperate to win business. And the steady growth of challenger banks is adding extra pressure.
This is especially problematic for Lloyds in the mortgage market, a segment in which the Black Horse Bank is by far the country’s biggest player. And figures released by UK Finance today illustrate this perfectly. Thanks to the growing influence of new players like Paragon Group and OneSavings Bank in this market, as well as an assault on the market by traditional heavyweights like Barclays, Lloyds’ total slice of the mortgage cake is starting to crumble.
Between 2017 and 2018 the financial giant’s market share fell 1.5% to 20.3%, causing total mortgage balances on its books to drop to £51bn from £52.5bn previously. Recent figures from Moneyfacts.co.uk show that the cut-throat trading environment continues to worsen. The number of 10-year fixed rate deals on the market has grown to 158 from 147 a year ago, while the average rate on these products has dropped to 2.76% from 3.08% previously.
More Brexit bother?
Possibly the biggest threat to Lloyds’ share price in 2020, though, is the prospect of the Brexit saga being drawn out for much longer, or the UK hurtling towards the no-deal trapdoor at the end of next year.
Britain’s banks saw their shares boom in value in October when the possibility of a so-called hard Brexit was taken off the table. It’s probable that Lloyds et al will start to move lower again as the difficulties of creating a new trade deal with the European Union (should we get to that point) by the end of next December grow. Prime Minister Johnson has said that we will be leaving the continental trading block with or without a trade accord being in place by the close of 2020, so brace yourself for more tension in the months ahead.
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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays 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.