Lloyds’s Broad Positive Outlook Not Yet Worth the Risk

Lloyds, one of the oldest banks in the UK, is one of the latest casualties of the most recent ECB stress tests. Earnings dropped after the results of the tests were released, causing shares to drop as well. The bank also announced plans to cut thousands of jobs. The nail in the financial coffin, however, was when Lloyds reported that it was still discussing dividend payments with the regulators. With profitability expected to return, the future of Lloyds is a slightly optimistic one, but in its current state it might make more sense for investors to steer clear of Lloyds for the time being.

Negative Factors Send Investors Running Scared

Out of the four banks in the UK that were tested through the ECB, Lloyds scored the lowest. Although it still passed, the bank’s poor performance brought up concerns that Lloyds would run into hard times as it tried to resolve its dividend payment discussions with the regulators. While the dividend payments discussion led a lot of investors to walk away from Lloyds, there are a number of other factors that caused Lloyds to fall out of favour, according to a report by IGa CFD and financial spread betting provider that recently launched an online stockbroking service. The aforementioned job cuts (9,000 cuts were planned) along with a £900 million charge for mis-selling shares were also a major blow to the company’s reliability.

While all of these factors are a concern there is another factor that is hurting Lloyds financial reputation; the housing market. In relation to the average salary, UK house prices are still reporting at a high level. With Lloyds holding about one-third of the new homes market and with the drop in new builds, this causes additional concerns as a lack of new mortgages would hurt the bank’s income significantly.

Valuation levels for Lloyds also don’t look great when compared to other banks. Lloyds is currently trading on a lower forward PE (10.11) than RBS (11.25) but actually costs more than the remaining four big name banks. LLoyds Shares have been trading in a rather tight margin since April of 2014. The shares have been moving between 70p and 80p. Sellers, however, continuously pushed the price down whenever it hit around 78p since the month of July with the buyers returning at around 71p. All of this tight movement coupled with the other factors regarding Lloyds, means that anything short of a significant turnaround would fail to help the bank’s credibility in the market.

Putting the Negatives into Perspective

While there are a lot of negative aspects regarding Lloyds’ place in the market, the overall outlook is actually positive. The bank has plans to pay out its dividends, albeit with a significant cut to the 65 percent dividend that was originally planned. Luckily, the cut will still show that the company has reasonable value.

As for the proposed job cuts, while they are significant they aren’t as large as the cuts that happened right after the financial crisis. With the popularity of online banking growing, there is also a good chance that all banks will be cutting staff due to a reduction in bank branches. Lloyds’ cuts, therefore, may just be the beginning of an industry trend.

The final bright spot in the rather bleak current state of Lloyds is its higher return (10.3 percent) on equity metric. The other banks have much lower returns (4.4 percent for RBS, 4.7 percent for Barclays, 9.4 percent for HSBC).