Questor: why is Lloyds Banking Group's share price going nowhere?

Richard Dyson 14 April 2017 • 7:23am

Men use Lloyds ATMs — Lloyds Banking Group: a persistent disappointment for shareholders

Lloyds Banking Group has many passionate devotees - it's consistently one of the most watched and purchased stocks among private investors, according to the biggest brokers - and yet its share price persistently disappoints. Why?

Questor bought Lloyds for this portfolio on December 9 at 62p.

It's a bank with a simple business model, a visible and improving capital position and a highly attractive yield (if the forecast 5.3p 2018 dividend is met, buying at today's price gives a yield of about 9pc).

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The multi-billion insurance mis-selling scandal is behind it. The Government's gradual disposal of its bail-out stake, which may have weighed on the share price hitherto, will reach an end within weeks.

Add to this the likelihood that a wider rate increase will raise margins - as, hopefully, will the bank's push into more profitable credit card and loan business. And then there is a commitment to substantial costcutting (more on that below). Why then the languishing share price?

Here are some possible answers to the riddle - and our further justification as to why Lloyds remains excellent value.

Brexit and domestic exposure

Institutional and overseas investors remain sellers of companies perceived to be British-focused, and Lloyds is a likely sufferer. Over the past 12 months Lloyds is down around 10pc compared to a 38pc rise in Standard Chartered. HSBC is up over 40pc (scroll down for price graphs).

Both the latter are wired into emerging markets.

Institutional money buying into a global recovery story would prefer them to the parochial Lloyds, especially if high yield is not a requirement.

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Ian Wells, of Kames Capital, said: "There are investors who take a view of the UK that it's going to get worse. They perceive businesses like Lloyds to be proxies for the domestic economy and they're selling." Mr Wells cites insurers Aviva and Legal & General (another holding in Questor's Income Portfolio) as suffering similar treatment. He has been adding to positions in both Lloyds and Aviva in his role as joint manager of the £55m Kames UK Equity Income portfolio.

House prices

Recent house price data indicate a weakening market. Yesterday the Royal Institution of Chartered Surveyors reported that the number of properties listed for sale was at an all-time low. Last week Halifax (a division of Lloyds) said annual price growth, at 3.8pc, was the lowest in four years, and that prices had flatlined since February. Rival lender Nationwide's measures showed an outright decline in prices for March, the largest such fall for five years.

Dramatic headlines on the back of this data has taken a toll on builders' and lenders' shares.

Lloyds's loan books are attractive in terms of loan-to-value and after years of growth, modest declines in house prices won't hurt. Where they could cause harm though is in crushing buyer confidence at a time when loan growth is modest and competition fierce.

Demand for housing outside of London's higher price-bands remains strong and under-supply remains a problem in most regions. It is not at all clear that a decline in price growth will turn into a protracted fall.

Reasons for cheer: better to be a shareholder than a customer

Let's take a gloomy outlook. Assume for instance that regulatory and other factors impede Lloyds's expansion into higher-margin unsecured lending; and that homeowners' confidence wilts, slowing loan growth.

Lloyds has already committed to cost-cuts - but this bleaker scenario would up the pressure.

There is plenty of scope. First, depositors' interest could be cut. On average 17pc of depositors' cash lodged at major British banks earns nothing.

At Lloyds, only 11p per £1 earns nothing, compared to 23p per £1 at Barclays (UBS figures published in February). It's hardly a customerfriendly move, but clearly Lloyds has some scope to pay savers less.

Second, Lloyds has plenty of opportunity to shut branches. Its 2008 HBoS takeover saddled it with a vast network with much overlapping. Its total 2,200 branches compare with Barclays's 1,500, for instance.

UBS's analysis finds that "broadly 35pc of retail costs are in the network" and reckons Lloyds has by far the biggest window for cuts, with "a saving of up to 22pc of pre-tax profits."

Axing branches is hardly popular.

But campaigns to maintain costly networks, once championed by MPs and local celebrities, are dying in the face of genuinely changing usage.

In due course the market will appreciate these advantages. For now, it's a strong hold. This portfolio is fully invested. Others might wish to top up.