Long-suffering FTSE 100 investors have had a serious boost from high street favourite Lloyds Banking Group (LSE:LLOY) in November 2020. The Lloyds share price is up 40% this month alone.
So is it all simply down to more positive market sentiment from news of potential Covid-19 vaccines? Or is there something deeper going on here?
Down in the dumps
In mid-September this year the Lloyds share price had sunk close to its lowest level since November 2011 at under 24p. The outlook appeared bleak, to say the least.
The bank had already lost 55% of its value in 2020. And the double threat of Brexit and the pandemic weighed heavily against any positive momentum.
The short sellers started circling. So the $49bn London-based hedge fund Marshall Wace laid a record £100m bet against the FTSE 100 stalwart, adding extra pressure to the Lloyds share price.
When investors or traders take out a ‘short’ position, they are betting that the share price of a company will fall further. If that result comes true, the short seller makes a profit. This kind of action carries large risks and so is usually the preserve of professional day traders. But if the Lloyds share price was to recover, for example, the hedge fund would lose a lot of money very quickly.
Elsewhere in the market, investors had their cautious hats on. And so there was no new money coming in to snap up the super-cheap Lloyds share price.
Lloyds share price profit
At the end of October 2020 that all changed. The bank released a Q3 update covering the first nine months of the year. What came out of it lit a fire under the Lloyds share price.
Lloyds had returned to profit. Pre-tax profits of £620m, to be precise. It could hardly have come at a better time.
In the previous quarter’s Q2 results, for the three months to the end of June, Lloyds posted a massive loss of £676m. Not only was it a significant financial hit, it was also hundreds of millions worse than City analysts expected. So the share price crumbled once again.
The main reason the bank cited was that it was forced to put aside £2.4bn for bad debts due to “significant deterioration in the economic outlook”. Along with worsening sentiment came the notion that many more businesses would fail to pay back debts owed to the bank.
And so, while it wasn’t all good news in the October update, with pre-tax profits still £1.94bn lower than in the same period in 2019, it was good enough.
Capital gains
Lloyds also added that its capital position was much improved. Its Common Equity Tier One capital (CET1) rose to 15.2% from 13.8% at the start of the year. This might sound like an arcane point, but it is particularly important.
Since the end of the great financial crisis and the banking collapse of 2008-09, banks have had to abide by strict regulatory rules and keep enough capital on hand to withstand severe financial stress. Banks must maintain a minimum CET1 ratio of 4.5% as well as keeping a 2.5% extra ‘buffer’ on hand.
So this strengthened position wasa sign of even stronger confidence that the bank — and hence the Lloyds share price — could ride out the worst of Covid-19 and return to business as usual on the other side.
