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Lloyds shares: what next after 95% crash in profits?

As the biggest provider of home loans in the UK and a supporter of small businesses, Lloyds' collapse in profits could spell bad news for the UK banking sector.

Lloyds Banking Group, one of the largest financial institutions in the UK, got off to a particularly rocky start as markets opened this morning amid the news that profits have crashed by more than 95%, compared with the previous quarter. With mounting economic carnage resulting from the ongoing COVID-19 crisis, Lloyds effectively saw its profits from the previous quarter wiped out completely.

While Lloyds has been experiencing acute difficulties since the pandemic first began unfolding, this newest revelation sets it apart from its rivals on the FTSE 100 index, with its performance and outlook looking significantly worse than the likes of Barclays and HSBC.

Let's take a closer look at the news unfolding from Lloyds, and what this could mean for the wider UK banking sector and the economy more generally.

Why Lloyds’ share price sunk this morning

While Lloyds has been experiencing significant turmoil over the past few weeks, its troubles have intensified in recent days in a way that could be seen as a turning point for the 325-year-old banking behemoth.

The company's 95% profit crash revealed this morning is largely the result of Lloyds having to take on a £1.4 billion charge in preparation for a surge in bad debts, as the bank's sizeable portfolio of mortgage borrowers and business loan recipients look increasingly unable to cover their obligations to Lloyds.

Pre-tax profits announced today amounted to £74 million, compared with £1.6 billion a year earlier, whilst net income shrank to £4 billion, which Lloyds has attributed in part to lost income resulting in lower interest rates and greatly reduced borrowing.

While operating costs for Lloyds were revealed to be down by 4%, this was not nearly enough to cover the staggering losses currently being experienced by one of Britain's largest lenders.

Lloyds also announced that it had arranged more than 880,000 loan repayment holidays for its borrowers, amounting to around £500 million worth of lost income in the past few weeks. There is little sign that Lloyds will be able to sustain a profit in the weeks ahead.

What are the implications for the FTSE 100?

The implications of the recent data coming out of London could be significant for the FTSE 100 index and the UK as a whole. As the single largest provider of homeowner loans in the country, as well as being one of the largest backers of businesses with a 24% market share of small business loans, Lloyds is viewed in many quarters as a kind of litmus test of the UK economy.

If revenues for the bank were to tumble further and they proved unable to continue providing lines of credit or debt relief for mortgage holders and small businesses, the ripples effects could be massive. All of the FTSE-listed UK banking giants have received substantial tax credits from the government to help them weather the current crisis, with Lloyds already receiving £406 million.

However, this hasn't been enough to prevent Lloyds' slide, which has it performing more poorly than HSBC and Barclays, who have kept their own share prices and revenues more stable. Yesterday, Barclays reported a profits decline of 38% which, although dire, is significantly better than the situation at Lloyds.

Given Lloyds' central role in the British economy, its poor performance could intensify the current turmoil for millions of businesses and individuals within the UK.

How to go long or short on Lloyds

You can take a position on Lloyds’ share price rising or falling with IG. Go long (buy) if you think the stock will climb, or go short (sell) if you think the stock price has further to fall.

You can do this with CFDs if you want to open a position with just a percentage of the capital.

  1. Open a trading account with IG or log in to your existing account
  2. Type ‘Lloyds’ or ‘LLOY’ in the search bar to locate the shares
  3. Choose your position size and click ‘buy’ to go long or ‘sell’ to go short
  4. Confirm your trade

With IG, investing in UK shares starts from just £3 for those who have traded three or more times in the previous month. Otherwise, commission is only £8

The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer.

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