We approached the end of 2019 with the prospect of a no-deal Brexit looking like it was disappearing. And I thought that could signal a turn in fortune for Lloyds Banking Group (LSE: LLOY) shareholders.
The shares even started to tick up in December once the election results were known. But that was before our new Prime Minister committed us to a do-or-die pact, insisting that EU negotiations must complete in 2020.
Alas, from a 73.66p high on 13 December, the Lloyds Bank share price has slumped by 22% to 57.4p.
Tough talks
In recent days, the EU has signalled a hardening stance on its negotiating position. Our European friends, it seems, aren’t going to just lie back and think of Boris. But I really don’t see why anyone would be the least bit surprised by that.
British banks aren’t going to get automatic passporting rights, but that shouldn’t make much direct difference to Lloyds, which has remade itself as a UK-focused retail bank. That’s been a success so far, turning it back to growing profitability.
After several years of recovering earnings, analysts are expecting to see pre-tax profit of around £6.8bn for the 2019 year just ended. We’ll have to wait until 20 February for the results, but I’ve seen nothing to suggest there’ll be any disappointment.
The balance sheet is a lot stronger now, and Lloyds comfortably passed the Bank of England’s latest stress tests in December.
Dividend
The dividend has come storming back too. There’s a yield of 5.9% on the cards for 2019, which would be around 2.1 times covered by predicted earnings. Forecast rises for the next couple of years would take that to 6.4% by 2021 (though cover would drop slightly, to 1.9 times).
If all that sounds good, and I think it does, why is the Lloyds share price performing so badly? The biggest bearish factor stems from the very same thing that isolates Lloyds from the EU financial markets. While focusing on the UK market makes a positive difference there, Lloyds is exposed solely to the UK’s economic performance. And that might not be great.
While the UK economy grew by 1.4% over the whole of 2019, the final quarter was flat. And the latest forecasts suggest overall weakening in 2020. And what if Boris’s bluster doesn’t get us a good deal with the EU? That, I reckon, would send the BoE back to its forecasting blackboard to erase all hope of growth in the next few years.
Then there’s competition, from both the challenger banks and from ever more new ways of moving cash around.
Still a buy
Saying all that, I still rate Lloyds as a buy.
We’re looking at forward P/E valuations of around 8.5, which I see as very much based on a worst-case scenario. I’ve never been a worst-case kind of person, and I think there’s too much downside fear priced into the shares.
If EU negotiations go well, I could see Lloyds shares storming ahead in 2020. But if they turn bad, I think we could be in for yet another weak year. What will I do? I’ll keep on taking my dividends, and I might even top up.
