While the broader FTSE 100 has leapt from March’s troughs, the blue-chip banks continue to struggle for traction. Take Lloyds Banking Group (LSE: LLOY) as an example. At around 30p, its shares remain just a whisker away from last month’s eight-year lows.
This is hardly a surprise. Britain is facing the sort of economic contraction not seen for centuries as it recovers from the Covid-19 crisis. What’s really spooking investors though is the threat that the Bank of England will increase measures to support the economy.
A number of Threadneedle Street policymakers have touted the possible introduction of more monetary easing in recent weeks. A plunge into negative interest rates is also seemingly on the table, surely to the despair of Lloyds. Worryingly another member of the central bank’s Monetary Policy Committee put his head above the parapet last week to comment on what we could possibly expect.
Bank talk
Thursday saw Michael Saunders take the time to demand that the bank take “aggressive” action to combat the economic destruction caused by the coronavirus, commenting that “it is safer to err on the side of easing somewhat too much, and then if necessary tighten as capacity pressures eventually build, rather than ease too little and find the economy gets stuck in a low inflation rut”.
He added that the threat posed by rising inflation is “negligible”, providing possible justification for the Bank of England to cut rates from their current record lows of 0.1%.
Saunders speculated that the post-Covid-19 downturn could last several years, suggesting that we can expect UK monetary policy to remain ultra-doveish for the foreseeable future.
Footsie fears
The economic downturn delivers a double whammy for Lloyds and its FTSE 100 peers like Barclays and RBS. The banks can expect a prolonged environment of weak revenues and a possible explosion in loan impairments. The former has already been forced to eat a £1.43bn charge in anticipation of tough trading conditions.
Such struggles were to be expected, of course. What perhaps was not is the size of the hunger from Bank of England policy setters to follow recent emergency action with more rate cuts and rounds of quantitative easing. No wonder share pickers are reluctant to go frantically dip buying over at Lloyds, then. Rock-bottom interest rates have crushed profits creation at the banks since the 2008–09 banking crisis.
Another big danger to Britain’s banks emerged this week, too. The threat of a no deal Brexit has damaged their business over the past few years. And the chances of this economically disruptive scenario have grown over the past month. The latest danger to trade talks collapsing in June is a fresh row over fishing rights after 2020.
Combined with the economic implications of the Covid-19 saga, it looks like Lloyds will struggle during the first few years of this new decade at least. This is therefore a share that Footsie investors need to avoid.
