Why I think Lloyds Banking Group plc is a clear sell

Lloyds Banking Group plc (LON: LLOY) could be a clear sell after Brexit.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Until 24 June, Lloyds(LSE: LLOY) outlook was relatively bright. Indeed, the bank was reporting some of the best figures in the UK banking industry with a return on equity in the high double-digits, a sector-leading tier one capital ratio and plans to nearly double its dividend payout over the next few years.

Unfortunately, since Brexit Lloyds’ outlook has now completely changed.

Brexit risks are rising

As one of the UK’s largest domestic banks and the largest mortgage lender, Lloyds is highly exposed to the UK economy. Cracks are already starting to show in the economy after Brexit as the Bank of England has introduced emergency liquidity measures, property funds have stopped redemptions, the value of the pound has collapsed, and shares in domestic companies have plunged.

These effects are likely to have more of an impact on Lloyds than other companies. Brexit has sent a shockwave through the UK’s property market, and if the moves in UK property shares, as well as the actions of commercial property fund managers are anything to go by, the sector is experiencing a sudden slump in demand. If this is really the case, Lloyds will be hit by both lower demand for its mortgages and increased stress on its mortgage portfolio as property prices decline.

Moreover, the Bank of England has hinted that it will cut interest rates further over the summer. Lloyds relies on the interest rate spread to make money. Simply put, the interest rate spread is the difference between the rate Lloyds pays depositors and charges borrowers. The lower the base rate, the tighter the interest rate spread will become, squeezing Lloyds’ income stream.

So, if the Bank of England does go ahead and cut interest rates over the summer, Lloyds is unlikely to meet City forecasts for growth for the next year.

Dividend hikes off the table

Another of the Bank of England’s monetary easing measures aimed at staving off a credit crunch following Brexit is the relaxation of rules that require banks to hold additional capital to protect against downturns. The total value of the capital withheld is £5.7bn and by freeing up this cash, banks will be able to lend an additional £150bn to households and businesses. Lloyds is already over-capitalised by choice, so it’s unlikely this move will make a big impact on the bank’s earnings in the near-term.

Bank of England Governor Mark Carney announced that banks wouldn’t be allowed to increase dividends as a result of this easing measure. Therefore, it looks as if Lloyds’ dividend payout is going to be stuck at 2.25p for the foreseeable future. Previously, City analysts had expected management to increase the payout to 3.8p this year for a yield of 7%. A further dividend increase to 4.1p for a yield of 7.5% was pencilled-in for 2017.

Overall, after Brexit Lloyds is facing a very uncertain future.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Young Black man sat in front of laptop while wearing headphones
Investing Articles

Down 53% in a year! I reckon this oversold FTSE 100 stock is now ripe for a comeback

This FTSE 100 stock has fallen out of fashion with investors, but Harvey Jones reckons the sell-off has gone too…

Read more »

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

How much second income would I get if I put £10k into dirt cheap Centrica shares?

Centric shares have been looking incredibly cheap despite rocketing in recent years. Harvey Jones wonders whether this is an opportunity…

Read more »

artificial intelligence investing algorithms
Investing Articles

If I’d invested £10k in AstraZeneca shares three months ago here’s what I’d have now

Harvey Jones is kicking himself for failing to buy AstraZeneca shares before the took off. Is there still a decent…

Read more »

A senior group of friends enjoying rowing on the River Derwent
Investing Articles

How I’d find shares to buy for an early retirement

Christopher Ruane explains some of the factors he considers when looking for shares to buy that could potentially help him…

Read more »

Investing Articles

Why I’d snap up bargain UK shares to try and build wealth

Christopher Ruane explains how he hopes to find high-quality UK shares selling at attractive prices, to help him build wealth…

Read more »

Young Caucasian woman at the street withdrawing money at the ATM
Investing Articles

Here’s how I’d target a £2k annual second income from a £20k Stocks & Shares ISA

Our writer explains how he’d try to earn thousands of pounds annually in dividends by investing a £20k ISA in…

Read more »

Mother and Daughter Blowing Bubbles
Investing Articles

5 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Investing Articles

The £20k Stocks and Shares ISA might be one of the better things about living in the UK

The £20k Stocks and Shares ISA doesn't have many equivalents in other countries. Here's why these accounts can help UK…

Read more »