CMC Markets | Jul 29, 2020 07:15
Since the start of 2020, Lloyd's share price has hit new multi-year lows, plummeting over 50% during the Covid-19 pandemic. It’s yet to make much of a recovery, still sitting at around 28p per share.
It’s arguable that this dip in Lloyds’ share price, mirrored widely across the sector, is due to the impact of external forces on banking in general rather than the bank’s performance itself. In a tumultuous 12 months, the uncertainty caused by Brexit gave way to the unprecedented coronavirus lockdown and potential long-term damage to the economy that brought with it. With many workers facing a change in circumstance and a loss of income through the crisis, banks are preparing mitigating measures.
The UK government furlough scheme is helping to cushion the falls in disposable income across the country, however the thousands of job losses that have been announced in the last few weeks are likely to create a trickle-down effect of loan restructurings and possible losses. In Q1 Lloyds set aside £1.4bn in respect of impairments, with total losses expected to hit £4.9bn. This suggests we could see another sizeable chunk set aside as part of Thursday’s half-year announcement, which could sway any Lloyds’ share price movement.
The only reassurance is that the UK government appears willing to backstop any new lending to keep the UK economy on life support. Unfortunately, that’s unlikely to address the real problem, which is expected to be one of widespread loan loss provisions as consumers default on their existing debt obligations.
It’s a big week for UK bank releases, with Lloyds being joined by Barclays (LON:BARC) and RBS (LON:NWG) in announcing their half-year results. The numbers will represent a bellwether on how banking has been impacted by Covid-19 restrictions.
Unlike their US peers, Lloyds and much of the UK sector have seen their investment banking divisions pared back in the past few years, which means they have been much more exposed to the sharp contraction that came our way on the back of the lockdown. While the likes of JPMorgan Chase (NYSE:JPM) and Morgan Stanley(NYSE:MS) (NYSE:MS) have thrived due to their investment banking operations, the backlash against so called ‘casino banking’ in the UK has meant that the less diversified UK banks have struggled in an extremely competitive UK market. Barclays has managed to buck this trend, as its investment division has started to perform better than expected in recent quarters, which in turn has helped mitigate any underperformance in its domestic retail operations.
Despite all these external factors, Morgan Stanley have set a 45p price target on Lloyds’ share price, describing the bank’s current share price as ‘compelling’. UBS (NYSE:UBS) and HSBC (LON:HSBA) have mirrored that target, while Lloyds (LON:LLOY) have been upgraded by Credit Suisse (SIX:CSGN). This would see a 47% rise on the current Lloyds share price.
If you’re keeping eye on the Lloyds half-year announcement and the rest of the numbers from across the sector, check out our UK banks share basket. Our share baskets allow the user to diversify their risk exposure across a wide range of sectors, either by spreading the risk of exposure across numerous assets, or alternatively acting as a hedge to an underlying long position.
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Written By: CMC Markets
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