2019 proved to be a year of both fist-pumping and head-holding for Lloyds Banking Group (LSE: LLOY).
On the plus side, the FTSE 100 bank could finally wave goodbye (or possibly gesture something more impolite) to the saga that has cost it billions of pounds over the years: the PPI mis-selling scandal. The actual costs, which already stand at a whopping £22bn for Lloyds alone, will continue to rise over the medium term as the claims pipeline is cleared. However, last August’s deadline allows the banking sector to finally look forward to an end to the colossal bills.
What’s been less encouraging for Lloyds, though, are signs that the UK economy continues to lose steam. The latest survey from the British Chambers of Commerce showed “protracted weakness across most indicators of economic health” during the final quarter of 2019, a situation that threatens to spread through the new year as Brexit-related uncertainty likely persists.
More rate cuts?
Despite the subsequent drop in profits that these difficult trading conditions has created for Lloyds, last year proved a period for its investors to savour. The bank’s share price boomed 23% by close of business on New Year’s Eve.
I fear that the Footsie firm may find it hard to repeat the trick of monster share price gains in 2020, however. The effect of a stagnating economy is that the Bank of England may be forced to cut rates again, the odds of which rocketed this week following comments from bank head Mark Carney.
He said that Threadneedle Street has been mulling the possibility of “near term stimulus” to get the economy firing again, adding that a “relatively prompt response” might be in order too. Low interest rates have been a millstone around the neck of the high street banks’ profit performance for more than a decade now, so the threat of more monetary loosening should fill the sector with dread.
A bursting consumer debt bubble
The growing pressure on the British economy has caused the number of bad loans on the books of Lloyds et al to leap of late, and I sure I’m not alone in predicting that impairments could continue to grow in 2020.
Fears of a consumer credit time bomb have long been doing the rounds, and data from trade union federation TUC this week has done nothing to dampen such concerns. It says that the average UK household now owes around £14,540, and that the amount of household debt has ballooned to record levels of £400bn.
Renowned economist John Maynard Keynes once opined that “the market can stay irrational longer than you can stay solvent,” and, while I’m not seeking to insult any recent buyers of Lloyds stock, I reckon the bank’s share price spurt is built on some quite shaky foundations.
Given the prospect of sustained and painful pressure on revenues and growing credit repayment failures, and with interest rates threatening to be cut again, I can’t help but fear for Lloyds in the new year. It’s a share I’m happy to continue avoiding.
