As Outlook Improves, What Next For Lloyds And RBS?
CMC Markets | Oct 24, 2014 11:31
The recent speculation surrounding potential job losses of 9,000 over the next three years by Lloyds Banking Group Plc (LONDON:LLOY), when they release their latest numbers next week is probably the latest attempt to create a business that is not only more durable, but also more able to adapt to the changing face of retail banking.
The share price reaction thus far has been somewhat muted probably because the details of the job cuts have yet to be confirmed, but given the changes taking place in terms of technology in banking they wouldn’t be a surprise.
Since 2008 the bank will have shed over 50,000 jobs as retail banking moves away from the cheque and paying in book type of banking that has been the hallmark of the last fifty years and moves to a much more digital offering.
With the advent of the internet and the increasing use of mobile devices the requirement for customers to go into an actual branch has made modern banking an increasingly faceless process, as customers pay for goods and services using credit or debit cards, mobile applications or use contactless payment.
Having seen the share price gain sharply since the 25p lows in 2012 the share price action this year to date has flattered to deceive, trading mostly in a range between lows at around 70p and highs of 80p.
The truth is the shares have been trading in somewhat of a no man’s land as investors await the next move, in terms of profits, write-downs and increased regulation.
On the one hand there is a hope that the bank will be able to start paying dividends again, which is no doubt helping support the share price, though this hope was dashed at the last update after the bank set aside another £1.1bn for legacy issues, PPI, Libor and other potential fines for FX price rigging.
Investors could well also be constrained by concerns about the strength of the UK economic recovery as we head towards next year’s general election, and whether or not the government will offload anymore of its 25% stake in the business.
Further uncertainty could well stem from some of the anti-business rhetoric that has come from the opposition Labour Party when they announced plans a few months ago to break up the main high street banks within a year of winning power.
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In January this year the Labour leader Ed Miliband announced that he would order the competition commission to report on how to implement a cap on the number of branches any of the big banks should have as a percentage of market share, and implement a plan to sell off any of those over a certain threshold to increase competition in the sector, if the Labour party were to win the next election.
Given that Lloyds and Royal Bank of Scotland Group PLC (LONDON:RBS) account for the majority of business and personal accounts this isn’t an insignificant concern which may account for the anaemic share price performance over the last few months for both banks share prices.
As it is, both banks have been required to offload surplus branches by European regulators, as a quid pro quo for being bailed out in 2008 and more political posturing between now and May is likely to concentrate the minds of investors as they look at the long term prospects of the UK banking sector.
That’s not to say that the outlook isn’t improving, it is with loan impairments improving in its last trading update to £758m, and these could see a further fall given the continued recovery seen over the past three months, while at some point the various legacy issues should start to diminish.
These factors are likely to be a key determinant in Royal Bank of Scotland’s trading update later next week as well, and will be amongst the main factors determining the next move in both banks share prices.
As we head into the year-end investors therefore have to weigh up the prospect of getting a green light for a resumption of the dividend to the prospect of a slight economic slowdown hitting profits and political risk creating an environment of risk aversion around the broader UK sector as we head into 2015.
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