When I last wrote about FTSE 100 giant Lloyds Banking Group (LSE: LLOY), its share price had crashed to the lowest levels since 2012. It has recovered somewhat since. At the last close, it was up by 15% from the sub-30 low seen recently. But the broader picture for LLOY remains unchanged. Its price is still weakening on average. So far in April, its share price is down by 21% compared to last month. This is after it already fell 31% in March.
Incoming data is discouraging
This may well continue. According to Lloyds Bank’s own research on its customers’ behaviour from a few days ago, there’s been a sharp drop in some segments of consumer spending since mid-March. Fuel and commuting spending are down most sharply, since people are staying at home. Food spending is still growing at a healthy rate.
While this can prop up overall consumer spending for the time being, I’d expect a sharp decline over time, based on other incoming trends. According to a Financial Times report, UK’s consumer confidence index, as compiled by research provider GfK, is down to levels last seen in 2008. A lack of confidence indicates that consumers may well curb expenses going forward. Consumption spends account for a bulk of the UK economy. If they are affected in a big way, I’d say it’s bad news for banks.
The banking business is such that it’s expected to slow down during cyclical recessions. But the recession that’s now due is a far cry from such cycles. This is an event-driven situation, not a recession that follows a boom. In fact, before the coronavirus struck, the UK economy had already been through a few years of economic uncertainty, not a boom.
The silver lining for Lloyds Bank
As difficult as the current situation is, there’s a silver lining. Unlike the recession that had its roots in the financial crisis of 2008, this one hasn’t originated in the same sector. There’s no doubt that banks will be negatively impacted, but they are not in the eye of the storm. If the economy manages to turn around swiftly after the crisis, the pain could still be short-lived.
For a long-term investor, Lloyds Bank could be a real bargain with its share price at current levels. Its price is still quite low, and if the slow-down can be overcome relatively fast the bank can stand to gain. But that’s a big if.
I’d much rather invest based on facts or at least reasonable possibilities. We won’t know for sure how long it will take to overcome the crisis and the recession it created. What we do know is that some sectors are more likely to suffer than others. And banking happens to be one of them.
Till the road ahead is a bit clearer, I’d like to maintain my uninvested position in Lloyds Bank.
