In days gone by, British banks like Lloyds Banking Group (LSE: LLOY) were safe places to invest your hard-earned cash. Sure, the prices of UK shares like these shook during times of broader economic volatility. But, over the long term, they could be relied upon to supply splendid shareholder returns, thanks to the historical strength and stability of the British economy.
The outlook for the FTSE 100 bank has become a lot murkier in recent years however. Firstly, Brexit has damaged the long-term picture for the UK economy considerably. And, more recently, Covid-19 has caused the worst domestic economic downturn for 300 years.
A multitude of risks
The colossal threats to Lloyds and its bottom line is echoed in a government report leaked to The Guardian newspaper yesterday.
According to Cabinet Office officials: “Winter 2020 could see a combination of severe flooding, pandemic influenza, a novel emerging infectious disease and coordinated industrial action, against a backdrop of the end of the [Brexit] transition period.”
The prospect of a no-deal Brexit on 1 January remains significant. And the long-term impact of a disorderly EU withdrawal on the British economy threatens to be exacerbated by the ongoing coronavirus crisis. Clearly, the risks to banks like Lloyds, which generate most or all of their earnings from these shores, are colossal.
These twin problems create another huge problem for the banks specifically too. This is because Bank of England interest rates — which were slashed to record lows of 0.1% as the Covid-19 crisis developed — may need to be reduced again to support the economy. They might even go negative in a move that would deal a colossal blow to Lloyds et al’s profits.
Leaving Lloyds on the shelf
The Lloyds share price has lost 40% of its value in 2020. But this doesn’t represent an attractive dip-buying opportunity, in my book. I reckon its share price is in danger of further falls, and particularly if fragile broker forecasts are indeed downgraded.
City analysts reckon Lloyds’ annual earnings will rebound 160% in 2021. And this leaves it trading on a forward price-to-earnings (P/E) ratio of 10 times. Still, for the reasons I mention above, those projected profits and that low multiple are in danger of being derailed.
I’m also not convinced by City expectations that Lloyds will pay a 1.7p per share dividend next year. The possibility that earnings will disappoint in 2021 isn’t the only reason why. I’m concerned that a hard Brexit and a continuation of the Covid-19 crisis might lead the Bank of England to prohibit UK banks from restarting their dividend policies any time soon.
Why take a chance on Lloyds today then? And especially when there are so many other cheap quality UK shares for investors to choose from? I plan to continue investing in my Stocks and Shares ISA in the weeks and months ahead. But the FTSE 100 banks won’t be on my shopping list.
Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended 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.