It’s been a painful few months for London-listed banks such as Lloyds Banking (LSE: LLOY). This particular financial powerhouse’s share price has crashed 31% since the middle of December. It’s now trading at its cheapest since autumn 2012, below 47p per share.
But I’m not tempted to go dip-buying with the FTSE 100 bank any time soon. It’s not just because of the threat posed by the coronavirus. Although, of course, the costs of a possible epidemic on these shores could be considerable.
A report released this week from Deutsche Bank illustrates the danger posed to Britain. It says economic growth could clock in at a meagre 0.5% in 2020 due to the crisis, half the previous prediction.
Along with the threat posed by the COVID-19 breakout, Deutsche Bank says slower global growth, supply chain disruptions, and weak household demand would also hamper the British economy.
As if this wasn’t enough for Lloyds shareholders to digest, its forecasters predict Bank of England policymakers could cut interest rates not once, but twice, this year. An environment of low interest rates has been a millstone around the neck of the banking sector ever since the 2008/2009 global financial meltdown.
More Brexit concern
News on the steady spread of the coronavirus may have been grabbing the headlines in recent weeks. But fresh news on the Brexit process, while not on the front pages, also threaten to throw a spanner in the works for Lloyds’ profits outlook in the near term and beyond.
According to Michel Barnier, the official charged with leading European Union trade negotiations with the UK, there are “very serious divergences” between the two sides. The first round of talks might be over but there’s still clearly a long way to go in a very short space of time. Downing Street has previously said it will axe talks altogether in the next few months in the absence of meaningful progress.
Cheap but risky
Lloyds is no stranger to the huge impact Brexit has had on its operations over the past year or more. Weakening economic conditions caused net income to drop 4% year-on-year in 2019 to £17.1bn. Impairments, meanwhile, galloped 38% higher to £1.3bn.
It’s difficult to see how the bank will fare much better in 2020, with Brexit uncertainty and the threat of a no-deal withdrawal from the European Union still hovering in the background. City analysts might be expecting earnings to surge 92% this year, but it’s an opinion I reckon will be wound right back as the year progresses.
Forget about Lloyds’ low price-to-earnings (P/E) ratio of 6.9 times for 2020 then. Pay little attention to its chunky 7.6% dividend yield too. This is a share that might be cheap, but it’s one that’s still laden with too much risk. I certainly plan to keep avoiding it.
