UK high street bank shares were clobbered hard in the last financial crisis, never really recovered their 2008 values, and now they are being hit again. The post boy for the malaise in UK high street banking has to be Lloyds Bank (LSE:LLOY), which has seen its share price crater by almost 50% since the beginning of March. If you want a barometer for the struggling British economy, this could be it.
Lloyds Bank shares had a brief rally between 22 May and 9 June, but the stock has developed a steady downward trend ever since. It has been less than impressive.
To add fuel to the flames, Marshall Wace, one of the biggest hedge funds in Europe, has said it has now taken a short position against Lloyds Bank stock, worth over GBP 100m. Other hedge funds with shorts on Lloyds include AQR Capital and Systematica Investments.
Marshall Wace says it is actually positive on the prospects for the UK economy, and unlike us, does not see Lloyds Bank shares as a good proxy for what could be a long winter for UK economic numbers.
Lloyds Bank is a UK-focused short trade
Part of the problem with Lloyds Bank is that it is very UK focused, nor does it have the sort of investing banking or trading operations that can come to the rescue, as they have for some of its competitors. helping to soften the blow of poor numbers.
On the upside, analysts covering Lloyds Bank stock remain positive – none of them have a sell recommendation still in place. The argument here goes that much of the bad news has already been priced in with the last set of Lloyds results. Lloyds registered a GBP 620m pre-tax loss in the first half of the year, and management say they are comfortable with the bank’s balance sheet. Based on forecasts from the bank itself, tangible net asset value should be falling to around 44.5p per share. At the time of writing, Lloyds shares were just under 30p.
Lloyds Bank shares trending down
But here’s our thesis: firstly, we have a decent trend line established on the Lloyds Bank share price, with the stock still falling more days than it gains. Certainly this has been the case since the start of June. As long as this trend remains in place and there is no sudden upside reversion, it should reward daily short trades.
Secondly, any forecasts about the health of the UK economy have to take into consideration the fact that at some point the UK government has to start withdrawing support for businesses. The government is already hurting, hence the recent rhetoric around getting employees back into the office. Analysts, in our view, are underestimating medium term impact on the economy, which has been heavily supported by stimulus measures in Q2. Lloyds Bank numbers have not really fully taken this into consideration. Looking back on the first half of the year does not provide a good picture of the stormy waters Lloyds is sailing into.
It is incredibly difficult for the bank to properly evaluate every last loan in its portfolio when it does not have an accurate picture of what government policy towards business is going to look like over the next six months. We don’t see our short trades as ever lasting more than a few weeks or months at a time, but we don’t see Lloyds turning this one around between now and Christmas.