Lloyds Banking Group PLC (LON:LLOY) shares have fallen about 15% over the past year amid worries about the bank’s exposure to the impact of a no-deal Brexit scenario.
But the drop in the share price may provide an opportunity for investors.
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Nicholas Hyett, equity analyst at Hargreaves Lansdown, said Lloyds is likely to “remain in limbo” until there is more certainty on Brexit but thinks there is a silver lining in the fact that the shares have underperformed in the past year.
“For long-term holders the depressed share price means there’s an attractive 6.4% dividend yield on offer, and a share buyback programme could deliver very attractive results long-term if all goes Lloyds’ way,” he said.
Lloyds has returned more than £3.2bn to shareholders this year after completing a £1bn share buy-back in August and paying final and interim dividends. The bank is now understood to be working on a plan to double the scale of its share buyback scheme next year to £2bn, according to a report by the Financial Times this week.
However, the risk for investors is what could happen to Lloyds if the UK leave the European Union without a deal in March 2019.
“The issue is that its position as the UK’s largest banker to consumers and small businesses makes it very sensitive to the fate of the UK economy, and with Brexit looming large investors just can’t get comfortable with that exposure,” Hyett said.
Following the bank’s well-received third quarter results on Thursday, chief financial officer George Culmer told reporters that 97% of the business is UK-focused.
He also said Lloyds remains optimistic about the UK securing a deal with the EU before Brexit.
“There is great uncertainty out there, but our continued expectation is for some sort of withdrawal agreement going forward,” he said.
Culmer to step down after H1 results next year
Culmer announced alongside the third quarter update that he would step down after the first half results next year, meaning the bank will need to find another finance chief to help steer it through Brexit.
The finance boss, who joined in 2012, played a key role in helping turnaround Lloyds after its government bailout in 2008 at the height of the financial crisis. Lloyds returned to full private ownership last year.
Graham Spooner, investment research analyst at The Share Centre, said: “The outlook for the group is hopeful but Brexit concerns appear to be holding the shares in check. We therefore keep our ‘hold’ recommendation but would suggest that the shares be viewed increasingly positively by income seekers.”
Despite concerns about Brexit, Lloyds reaffirmed its financial targets for 2018 and the longer term.
Under a three-year strategy announced in February, Lloyds is digitising its operations and expanding outside core markets like mortgages where competition has been tough.
For the third quarter to September 30, Lloyds reported pre-tax profit of £1.82bn, down 7% on last year but ahead of analysts’ expectations of £1.7bn.
In late morning trading, shares increased 2.1% to 57.8p.