While the company's shares look rather undervalued at the moment, there are many factors going into the decision whether to invest in the Lloyds Banking Group stock. Let’s find out what is currently happening in the banking industry and what the Lloyds share forecast 2019 is looking like.
UK banking market overview
Reflecting the global political and economic uncertainty, the choice of a business sector to invest in can be rather hard. Many tend to choose the banking industry, referring to it as one of the few safe havens available today. The modern global banking system is larger, better capitalised and more profitable than it has been at any time in the past decade.
Since the financial crisis of 2008, the UK’s retail banking industry has undergone many changes. The majority of these were made in order to improve the customers’ banking experience and regain their trust.
Today, the country’s banking sector remains the fourth-largest worldwide and the largest in Europe: it includes over 300 banks and 45 building societies. The so-called Big Four Banks, including HSBC, Royal Bank of Scotland, Barclays and Lloyds Banking Group, are managing over 75% of all British private accounts and 85% of business accounts — a total of about £5 trillion in assets — and employing more than 560,000 people.
What is Lloyds Banking Group?
Lloyds Banking Group is a major British financial institution, tracing its roots back to 1765. It enjoys an extensive presence overseas, including operations in Europe, the United States, Asia and the Middle East. The company’s key activities are organised into the following divisions: retail banking, commercial banking and insurance and wealth management.
At present, Lloyds Banking Group has over 30 million customers. It is the UK's leading provider of current accounts, personal loans, mortgages, savings and credit cards. Operating a multi-brand strategy, the company’s biggest names include Lloyds Bank, Halifax and Bank of Scotland.
The company’s shares are traded on the London Stock Exchange under the ticker symbol LLOY and on the New York Stock Exchange under the ticker symbol LYG. As of today, Lloyds Banking Group is a constituent of the FTSE 100 Index.
The company's performance in the first half of 2019
As history suggests, Lloyds has been continuously growing its earnings per share after it got itself out of the last financial crisis.
However, modest growth in the first quarter of 2019 has drawn many into guessing whether the company was entering a period of stagnation in terms of profits and revenue. These doubts have been confirmed on July 31, when its half-year report was published, dragging the share price lower.
While City analysts were predicting the company’s pre-tax profits to be around £3.45 billion, the report revealed that these came in weaker than expected at £2.9 billion. That is 7% lower compared to £3.12 billion in the year-earlier period. Net income was also down, as well as the return on tangible equity.
Due to its fluctuating nature, the Lloyds Banking Group share price has frustrated shareholders for years. However, it may be a different case now, should the company’s status quo come to an abrupt end.
What is the current outlook for Lloyds shares?
There are a number of things that could possibly affect the outlook for Lloyds shares. If you want to invest in the company, here is what you need to watch out for in the second half of 2019:
The UK economy. As a domestically-focused bank, Lloyds is highly exposed to the UK economy. Any unforeseen economic decline could cause the company’s profits to dry up. Meanwhile, the UK economy shrank for the first time since 2012 in Q2 of this year. Therefore, if you decide to invest in Lloyds, it is very important to follow the latest British economic trends.
Brexit uncertainty. The ongoing Brexit debates continue to hamper many sectors of the UK economy. In the past three months, Lloyds share price lost 13.5% amid fears of a no-deal Brexit and overall shaky economic situation. A withdrawal from the European Union without a trade deal is threatening for the UK economy and the banking sector in particular.
UK interest rates. In summer 2018, the Bank of England increased its key interest rate to 0.75%. Today, however, with increasing possibility of a no-deal Brexit, an interest rate cut is looming large in stock market forecasts. This, in turn, can hurt not only Lloyds but the banking sector as a whole, since higher interest rates allow banks to get a larger spread between the money they lend out and borrow.
PPI claims. The current PPI issue shows that the legacy of the financial crisis still hangs over the industry. Lloyds Banking Group said that it expects a flood of claims ahead of the August 29 PPI deadline. The total bill is predicted to hit £20 billion, which is more than half of the company’s current market value.
Fintech development. Finally, the company is trying to keep pace with the innovations happening in the banking sector. Contemporary digital banks and advanced Fintech firms are steadily changing the way the banking industry works. Lloyds is focusing on becoming more digital. As an example, it has recently partnered with San Francisco-based Insurtech firm Trov to provide its UK customers with a variety of digital insurance products. However, the company needs to make sure that it stays up-to-date, or it will be likely to start losing customers to more advanced competitors.
Branch closing. Last but not least, at the beginning of the year, Lloyds has announced its decision to close a number of its branches across the UK, calling into question the company's stability and well-being.
Lloyds share forecast: what does the future hold?
Because of the combination of all the factors mentioned above, it might be rather difficult to guess what Lloyds share price forecast will look like tomorrow.
On August 1, analysts at Berenberg Bank cut their target price for the company’s shares from 60 penny sterling (GBX) to 55p, lowering their revenue estimates for 2019—2021 by around 20% per year.
Recently, several other equity analysts have also issued reports on Lloyds Banking Group. On May 21, Bank of America set a 55p price objective on the company’s shares and rated them as “underperforming.” On July 31, Goldman Sachs Group gave the company a “neutral” rating and set a target price of 67p. Meanwhile, JPMorgan Chase & Co. has also downgraded Lloyds Banking Group, lowering the price target from 80p to 70p.
Speaking of long-term predictions, according to Wallet Investor forecast, an increase is expected, with the company’s share price predicted to reach around 81.49p in mid-2024. Therefore, if you decide to buy the shares today, the revenue would be anticipated to run up to around +67.2%.
On the other hand, another popular forecasting source, Pound Forecast, is not being as optimistic, predicting LLOY to experience considerable losses in the foreseeable future:
According to what the Lloyds shares predictions tell us, it may not be the perfect time to invest in the British banking giant. However, you can still try to profit from the price volatility through contracts for difference.
How to trade Lloyds shares CFDs
A contract for difference, or CFD, is a financial instrument between a broker and an investor, in which one party agrees to pay the other the difference in the value of a security, between the start and end of the trade. You can either take a long position, speculating that the price will rise, or a short position, speculating that the price will fall. Therefore, no matter whether you have a positive or negative view of the Lloyds share forecast, you can still try to profit from the future price fluctuations.
If you trade Lloyds shares using CFDs, you speculate on the direction of the underlying asset, without taking ownership of it. It allows trading on margin, additionally providing you with greater liquidity and easier execution. However, note that CFDs are a leveraged product. Therefore, profits, as well as losses, are magnified.
So, what is your bet? Will Lloyds shares go up or fall? Stay up-to-date with the Lloyds shares latest news, and keep track of the prices live with the comprehensive charts on Capital.com.
Learn more about CFD trading with free online courses provided by Capital.com.
Photo: Simon Vayr