Lloyds shares buffeted by consumer concern

Lloyds’ quarterly profit scraped in just below expectations, a trifling pretext for profit taking in the shares—especially after an early spike on Wednesday close to September’s 68 pence highs. Additionally, as Britain’s biggest mortgage lender and high street bank, investor sensitivity to consumer currents is high. There was probably little that CEO António Horta-Osório could say in reply to a conference call question about the economic impact of a 25 basis point rate rise that would salve all doubts. It hasn’t helped that loan impairments on aggregate were higher in the quarter, feeding concerns about a household borrowing market that is clearly overleveraged in parts. Investors listening out for signals about a widely hoped for dividend rise will be concerned that Lloyds may opt for caution if pockets of distress widen.

The more optimistic case includes that total income was above forecast, underlying profit growth firm at the half-year’s 8% rate and that an unexpected 47.5bp lift at the midpoint of Lloyds’ forecast capital generation should offset higher capital requirements that are almost certain to be prescribed within stress tests late this year. At the same time, gross asset quality was unchanged in the quarter and a 1.2 percentage point rise in provisions as a percentage of impairments looks largely down to “a single corporate impairment” in the quarter. In short, whilst it’s difficult to downplay increasing potential for headwinds against Lloyds’ uniquely domesticated exposure, these pressures haven’t arrived yet. In the meantime, the bank could scarcely be in ruder health and all indications point to an increment of dividend growth that reflects that.

Likewise, the positive case edges bearish undertones in the Lloyds Banking Group price chart at the moment. It’s notable that the stock has risen back to the top of the day’s 4% range at the time of writing. In the context of a descending trend line across numerous highs since June and a shorter upward line validated a handful of times since September, we can in fact state that price action has broken to the upside. This is quite apart from the incontrovertible uptrend since July 2016 lows. Should the stock clear 68p resistance—likely, in context and underpinned by favourable momentum trends (see red RSI sub-chart)—we expect c.69.5p to come into view as a buying objective. Stabilisation above the 68-69.6p resistance band would certainly need to be in the bag before thoughts of another attempt at 2017’s highs above 70p. Over a longer-term view, it’s difficult to find a stretch during the last decade like the one in effect since last July that has appeared more underpinned. That view partly rests on the shares' ability to remain above the 61.61p-62p support band, corroborated on at least three occasions since last December.