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Lloyds share price: action indicates there is more to come from UK banking sector


We added Lloyds Bank (LSE:LLOY) to our pick yesterday, largely because we are seeing more positive investor sentiment stacking up behind it as the vaccination program continues in the UK and the stock takes another leg up on its journey back to pre-pandemic valuations.

Lloyds Bank shares: positive price action

The latest jump in Lloyds shares has taken them from 32.99 on 29 January, to close to 40.3 at the time of writing. Looking at the one year chart Lloyds still has quite some way to go. Unlike many other sectors, UK banking has remained relatively subdued following the approval of the Pfizer vaccine. The market has been digesting a number of significant risks, including the level of government support for UK business and the impact of Brexit.

Unlike  Barclays, which we compared Lloyds against, the bank has a stronger and more focused exposure to the UK economy. The same goes if you look at it against HSBC.

The market had to digest bad news from Lloyds’ latest earnings report last month. Full year net income was down 16% year on year due to payment holidays, lower interest rates and a shift out of unsecured lending. Profits before tax were down 72%, but then we were expecting that. But on the positive, the bank declared a final dividend, and it was at the highest level permitted.

In its analysis Hargreaves Lansdown has noted that the big headwind is the interested rate environment. As it rightly points out, rates on bank accounts are already on the floor and the cost of funding cannot be pushed much lower.

“Loan rates don’t have much further to fall and Lloyds’ deposits have actually grown despite the interest rate cuts. If a net interest margin of around 2.40% is sustainable, that should be manageable for Lloyds – even if it’s not highly profitable. Given that low interest rates look like they’re here to stay, and could even turn negative, it’s perhaps no surprise Lloyds is looking elsewhere for growth,” the broker said in its client note.

Further positives

There are some further positives to digest here: an increased focus on institutional and corporate clients means Lloyds has scope to generate more fee-based income; there is also insurance, asset management and pensions which the bank can revisit if it gets really imaginative. The bank’s balance sheet also looks in good shape.

Hargreaves Lansdown reckons Lloyds could not have offered a much higher dividend to investors, even had it wanted to.

We are seeing significant further institutional appetite for the stock developing, looking into Q2. This means fund managers and pension funds, among others will be revisiting it, barring any unforeseen bad news. Appetite levels are higher than they are for Barclays shares, for example, but the gap with price levels in Jan/Feb 2020 is bigger for Lloyds. We also like the fact that many risk factors seem to be starting to disappear for Lloyds within the wider UK economic picture.

There’s not much can be done at the moment about the low interest rate situation, but that is a problem almost all big banks have to grapple with at the moment.

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This article does not constitute investment advice. Do your own research or consult a professional advisor.

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