CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Lloyds Banking Group is still too good a UK bellwether

Article By: ,  Financial Analyst

Lloyds Banking Group is still too good a UK bellwether

Lloyds Banking Group investors may be distracted by preference share concerns on Tuesday, but the cool reception to its first-quarter performance hangs more on overexposure to UK economic uncertainties.

Your preferences are safe with Lloyds

For Lloyds, worries about preference shares are a sideshow, though investors were right to press for clarification. The bank’s CFO pointed out that at no point has the group contemplated similar actions as those planned by Aviva. The insurer recently sparked discussions amongst shareholders of a swathe of large UK firms after saying it would scrap high-yielding stock. Were it not for Aviva raising the issue – it eventually abandoned the idea under pressure of dissent – preference stock worries would be entirely irrelevant for Lloyds.

Lloyds Bank as strong as UK economy

The bank’s quarterly profit coming in slightly light of forecasts is only slightly more material.  A 23% growth rate to £1.6bn cannot be interpreted in any other way than indicative of robust health across key businesses. A UK economy that remains “resilient, benefiting from low unemployment and continued GDP growth”, helps, as Lloyds’s CEO, noted. The worry though is that Lloyds is not moving fast enough to shore up defences for a possible deterioration of the outlook, perhaps precipitated by the UK’s exit from the EU. The bank can claim the benefit of the doubt for loan losses more than doubling in Q1 to £258m, a fraction of total loans and advances in the quarter of £445bn. However, another £90m being added to PPI-related provision is an uncomfortable reminder that conduct charges can play havoc with plans to cut costs, after they rose by a fifth last year. Operating costs actually rose 2% to £2.008bn in Q1, suggesting Lloyds could cut it fine to meet a target of £8bn for the whole of 2019. A cost to income ratio of 45% in the same year also continues to look a stretch. Lloyds is already streets ahead of similar lenders which average around 60%. But further improvement implies more cost cuts. After the most recent cycle of these, it’s difficult to see where. Furthermore, the bank’s key capital position as defined by its Common Equity Tier One Ratio, whilst flashing no warnings about ability to execute dividend and buyback plans, was largely static at the end-2017’s level, net of dividend accrual.

Essentially then, Britain’s biggest and best-run lender has revealed no cause for immediate concern, but there was little evidence in Q1 that shareholder returns could expand significantly this year. Risks linked to Lloyds’ dominance of the UK loan market also remain in focus.

Thoughts on Lloyds Banking Group’s share price chart

After grinding 50% higher between early July 2016 and the end late January, Lloyds Banking Group shares have returned to an earlier pattern of going nowhere fast. They have in fact been stuck in the range of 61.6p-73.6p since mid-December 2016. The stock has now tagged prices close to 73.6p on two clear occasions – in May 2016 and May 2017 - and marked another mini-cycle peak not much lower - 72.76-72.77p - towards the end of January. It appears that for whatever reason, there is a barrier preventing investors from buying above these rates for the time being – a definition of resistance. The stock’s clear breach, in December, of its cleanest recent uptrend also points to the end of a phase of relatively smooth gains. Lloyds’s 200-day moving average (200-DMA) line does at least have a flat profile, suggesting that the medium-term outlook for the shares should be relatively stable – though remember past performance is not a reliable indicator of future performance. In any case, the stock was below the 200-DMA at last check. Generally, trade below the threshold is a green light for active sellers and a red light for buyers. Furthermore, oscillators like the relative strength index (RSI) (see sub-chart) are declining in line with the price. That points to a continuation of Lloyds’s current down leg, at least until the RSI becomes over sold beyond its lower bound. Even after that, recovery could still be prolonged. A measure of additional support aside from the lower end of the stock’s range mentioned above is discernible near 64.3p, but better-corroborated 61.6-62.2p support offers higher probability of a sustainable rebound.

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