Over the weekend, I wrote a piece laying out three reasons why investors in Lloyds Banking Group (LSE: LLOY) could be cradling their heads in despair by next December.
I explained why one, or a combination of, fresh Bank of England interest rate cuts, an extension of Brexit uncertainty, and rising competition, could see the FTSE 100 bank sink in value in 2020. After a rocky first 10 months of the year, Lloyds’ share price has risen around 20%, gains delivered solely on the back of a no-deal Brexit being removed for the end of October.
But don’t expect the Black Horse bank’s rise to keep going, I say. The threat of a disorderly European Union withdrawal remains very real, the date pushed back to the end of next December rather than taken off the table. Thus the huge buying of Lloyds shares looks more than a tad frothy, in my opinion.
Of course, intense Brexit uncertainty and the slowing UK economy of late are not two mutually-exclusive issues. But it’s clear the step-up in US-led trade tensions with China, Brazil and Argentina, allied with signs of worsening economic conditions in Germany (and by extension the eurozone), are having an impact too. And so even if London’s negotiations with Brussels go smoothly over the next 12 months, there’s plenty of other reason to expect the British economy to toil next year.
A tough outlook for 2020 comes as a particular worry for Lloyds et al as personal debt levels rise. Ballooning consumer debt has long been a worry for the sector and latest data from the Office for National Statistics will have done nothing to soothe nerves.
According to the body, total household debt (excluding mortgages) had risen 11% during the two years to March 2018, to £119bn. And it’s likely the abundance of cheap credit out there means the number has continued to swell. Lloyds’ admission that impairment charges had boomed 28% in the first nine months of 2019, to £950m, is a likely symptom of rising debt in these economically-troubled times and bodes ill for 2020.
Growing capital requirement to hit dividends?
The big attraction of Lloyds stock is the vast 5.7% dividend yield which investors can access. However, this figure is built on City expectations that shareholder payouts will keep increasing. I, for one, am not so sure this will transpire, and not only because of its patchy profits outlook.
Lloyds was forced to halt share buybacks in September as PPI bills steadily stacked up and impaired capital build. The summer claims deadline may have removed the threat of more colossal penalties in 2020, though another threat has emerged. In recent days, the European Banking Authority has said the continent’s banks face a capital shortfall of €124.8bn under Basel III rules.
What does this mean? Well the regulator says lenders will have to boost their minimum capital reserves by a colossal 23.6% on average by 2027. Lloyds made titanic strides to rebuild its balance sheet in the wake of the financial crisis, but it may be forced to do it all again following the report. And this could come at the expense of dividends.
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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019