Lloyds shares fall as new chief Charlie Munn takes over
Lloyds (LON: LLOY) shares are down by over 3% this week
Former HSBC executive took over as chief executive on Monday (16 August 2021)
He joins Lloyds, the UK’s third largest bank by market capitalisation, two weeks after its acquisition of Embark
One of his immediate tasks will be the group’s “Strategic Review 2021”
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New chief executive fails to lift market sentiments
Lloyds Banking Group’s new chief executive Charlie Nunn is off to a rocky start. At least that’s what the bank’s share price performance so far this week is telling us.
Nunn assumed his new role officially on Monday. Lloyds shares have since fallen 3.4%.
Market performance aside, Nunn says he feels ‘privileged’ to step into the role of chief executive, as Lloyds ‘is an organisation I’ve observed and admired from a distance for many years’.
‘So while I have a good feel for the business and its role in the sector, I know I still have a lot to learn about Lloyds Banking Group – and there’s nothing like getting up close and personal to really understand an organisation,’ he wrote in a post on day one.
‘That’s why I’m planning to spend the first few months getting to know our people, our customers and our business better before outlining any strategic plans.’
He will then turn his attention to the group’s “Strategic Review 2021”, first announced in February 2021. Other matters, including a recent £390 million acquisition of retirement solutions provider Embark, will likely be high on Nunn’s to-do list.
The former HSBC executive’s appointment was first announced last November, replacing Antonio Horta-Osorio, who held the position for a decade.
Why are analysts divided on the stock?
Two weeks ago, the group reported its H1 2021 results, in which profits jumped up to £3.9 billion, against a £0.6 billion loss in H1 2020.
Credit Suisse, JPMorgan and UBS analysts then raised their target prices on Lloyds shares, which are up 27.5% so far this year.
Credit Suisse maintained an ‘outperform’ call on the stock while lifting the price target on LLOY to 61p from 60p a share, on the back of higher revised earnings for the rest of 2021, 2022 and 2023.
UBS raised its price target to 55p from 54p previously alongside a ‘buy’ rating, while JPMorgan, which continues to recommend ‘outperform’, is now eyeing a fair value estimate of 60p, up from 59p before.
However, Goldman Sachs cut its rating on the stock to ‘sell’ from ‘neutral’ and price target to 45p from 50p.
The firm believes that mortgage pricing is ‘again becoming a headwind’ for UK banks, and as such sees ‘risks being skewed to the downside, with mortgage pricing testing prior trough levels of around 80-90bp becoming a distinct possibility’.
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Why is the Lloyds share price so cheap and will it ever change?
Since the financial crisis, the Lloyds (LSE: LLOY) share price has had a cloud hanging over it. After the group came close to collapse in 2008, investors have stayed away.
And it isn’t just Lloyds that’s suffered. UK investors have also been avoiding other large financial institutions.
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This is one of the main reasons the Lloyds share price has struggled to move higher over the past decade.
However, in recent years, the bank has moved on from its mistakes. It has returned to full private ownership, restored its dividend, and dived into new markets. But all of these initiatives have failed to improve investor sentiment towards the company.
Over the past five years, the stock has produced a total return of just 0.9% per annum.
Unfortunately, it seems as if there’s another reason why shares in the bank haven’t budged over the past few years. It doesn’t look as if this headwind is going to disappear anytime soon.
Lloyds share price headwinds
Something that’s affected every single bank in the UK, and indeed Europe, over the past 10 years is the interest rate environment.
Interest rates have been pinned firmly to the ground, punishing savers and lenders alike. When the pandemic started, central banks acted by cutting rates even further, only adding to the challenges banks face.
If banks can’t lend at high rates of interest, their income will come under pressure. That’s what’s happened. Lenders have been struggling to grow profits. They’ve acted by slashing costs and expanding, but these efforts have only offset some of the declines in income.
At the same time, lenders have been fighting each other for business. This has only made a bad situation worse, although it’s been great news for borrowers.
The good news is, it would appear, that this could be about to change. According to some economists, the Bank of England may hike interest rates in the first half of next year.
These are just forecasts at this stage, and there’s no guarantee the bank will take this action. Another wave of coronavirus could set these plans back a year or more.
However, if this scenario plays out, there could be a light for banks at the end of the long tunnel.
Changing environment
I think if interest rates rise, the Lloyds share price should react favourably. Higher rates will allow the bank to charge more for its loans and earn more income. This should help convince the market that the business is worth more than it was when rates were pinned to the floor.
As such, I’d buy the stock today for my portfolio as a recovery play. In the meantime, the stock also offers a dividend yield of around 3%. After languishing for five years without returns, if interest rates start to rise next year, it could be Lloyds’ time to shine.
Lloyds share price: 3 things to consider ahead of Q2 results
Lloyds Banking Group PLC (LON: LLOY) share price is up by 32% so far in 2021
UK’s third largest bank is due to release its second quarter and half-year 2021 results on Thursday (29 July 2021)
Analysts are expecting an uptick on the group’s Q2 performance
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UK financial institution Lloyds Banking Group is scheduled to report its second quarter and half-year results for the 2021 financial year, before the market opens on Thursday (29 July 2021).
Below are some things for investors to consider ahead of the earnings release.
- LLOY’s stock price soars on improved outlook
Shares of Lloyds, UK’s third largest bank by market capitalisation, have risen over 32% so far this year, as the country’s economic outlook improved with nearly 60% of the population having received two doses of a Covid-19 vaccine.
The stock currently has a ‘buy’ rating from nine out of 11 analysts and a consensus price target of £50.44, according to the latest data published by MarketBeat.
The price target represents a potential 9.4% upside from LLOY’s latest price of £46.12.
The most recent investment case came from Deutsche Bank analyst Robert Noble, who gave a ‘Catalyst Call: Buy’ rating on the bank on 23 July 2021, while naming it as a short-term investment idea.
Earlier this month, UBS also kept a ‘buy’ recommendation on the bank, while raising its price estimate to £54 from £51 previously.
- The group raised its guidance for 2021
Following its ‘solid’ financial performance in the first quarter, the group enhanced its earnings guidance for 2021.
Lloyds is now expecting - based on its economic assumptions as of end-April - for net interest margin to be in excess of 245 points, operating costs to fall to roughly £7.5 billion, net asset quality ratio to come in below 25 basis points, and statutory return on tangible equity to end up between 8% and 10%.
Full year impairment charge is also expected to be ‘materially lower’ than the guidance set out at the end of 2020, thanks to a £459 million release of expected credit loss and other benefits recognised in Q1.
Finally, the group said it was ‘accruing dividends’ with the ‘intention to resume its progressive and sustainable ordinary dividend policy’. This is a key point to watch, with the Bank of England having fully removed restrictions on UK banks' dividend payouts on 13 July.
Meanwhile, Deutsche Bank’s Noble predicted that Lloyds’ Q2 earnings will improve as a result of stronger pre-provision profit growth and better-than-expected capital generation.
- Lloyds’ net interest income fell 9% in Q1
The group’s statutory profit before tax for Q1 2021 was 140% higher year-on-year at £1.9 billion. It attributed the improvement to solid business momentum and a net impairment credit as a result of the UK’s improved economic outlook.
Underlying profit was £2.07 billion, compared to £558 million in the first three months of 2020, which reflected the improved impairment outcome and lower total costs.
Trading surplus is recovering at £1.75 billion, down 12% compared to the first three months of 2020, but up 21% from Q4 of 2020.
Net interest income of £2.7 billion was down 9% year on year, impacted by a reduced banking net interest margin of 2.49%, in line with the lower rate environment.
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*Based on revenue excluding FX (published financial statements, June 2020)