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Lloyds share price: what to expect from first-half results

A slowing outlook for consumer lending and the possibility of a no-deal Brexit hang over Lloyds, leaving the share price under pressure.

When are Lloyds’ first-half earnings published?

Lloyds publishes its first-half (H1) figures on 31 July 2019.

Lloyds’ first-half earnings: what does the City expect?

Lloyds is expected to report pre-tax profit of £4.3 billion, up from £3.1 billion a year earlier, while revenue is expected to rise to £9.4 billion. 

The Q1 update spooked investors, warning that the revenues were flat for the period, while impairments from bad loans rose, a ‘double-whammy’ that is bound to worry many. Weakening consumer credit growth in the UK continues to suggest a more difficult outlook for the UK banking sector, without even mentioning Brexit and the problems this may cause should the UK be forced into a ‘no deal’ situation. At least the mortgage situation is still promising, since total mortgage approvals remained relatively strong in May. 

On the positive side of things, the bank continues with its cost-cutting and capital management plans, which are designed to lift the bank’s return on tangible equity (ROTE). At the least, this strict approach to cost control will help lessen the weakening of consumer loan growth, although it will be unable to counter it entirely. 

Lloyds faces the same problem as the other big UK banks – namely that a no deal Brexit is now much more likely. If such an outcome does occur, then analysts expect a fall in loan rates and higher impairment charges from non-performing loans as businesses and individuals find it harder to make loan repayments. This will disrupt plans to build capital and boost dividend returns, decreasing the attractiveness of the shares for investors. 

Lloyds shares have become steadily cheaper since the beginning of Q2. They currently trade at 7.3 times forward earnings. This is still above the 6.6 times we saw at the beginning of the year, but is well below the five year average of nine times forward earnings. Given the headwinds facing UK banks, this low valuation seems justified. 

For some investors, Lloyds will be attractive for its high dividend yield, which currently sits at 5.65%. But while the bank is committed to maintaining this payout, it is unwise to buy the shares merely for the income on offer. The banking sector’s problems mean that the high yield should send a cautious signal, and not point towards an attractive income opportunity.

How to trade Lloyds’ H1 earnings

The average move on results day for Lloyds is 4.8%, but at present options pricing suggests a quieter day, with a move of 3.9% indicated. There are currently 28 analysts covering the stock, with 17 ‘buys’, eight ‘holds’ and three ‘sells’. The current target price of 71p is 25% above the current 57p price.

Lloyds share price: technical analysis

The stellar rally in Lloyds’ shares from December until April has given way to a period of range-bound trading. The price dropped back from 66p all the way to 56p, retracing around 40% of the December-April rally. Since then, the price has hovered above 56p, holding this line as firm support. 

Gains have proven difficult to sustain above 58p, and in the past month a falling 50-day simple moving average (SMA) has contained any upward progress. So long as the 56p support zone holds the price may continue to move between the 56p and 58p levels. 

A move below 56p would take the price on to 54p, and then down to 51.66p, continuing to eat into the gains made over the past few months. On the other hand, a bounce above 59p would begin to mark a more bullish move, and open the way to 60p, 62p and then on to 66p. Dip buyers may begin to enter to drive the price higher once new forward momentum has been established.

Lloyds: a tough future clouded by Brexit

Were it not for Brexit, Lloyds may have been further down the path to recovery. There is still plenty to like about the firm, given its dominance in the mortgage market, and its exposure to a UK economy that, for all its faults, is seeing improvements in employment and wages. The bank has also weathered the producer price index (PPI) storm, although further payments will continue to mount up, the end is in sight for this hardy perennial of bank results. A solid dividend and strict cost control efforts have also helped to improve the balance sheet. 

However, it is Brexit that makes life difficult for Lloyds’ investors. The firm will be one of the first to suffer if the UK crashes out of the EU without a deal, as lending contracts and consumers rein in their spending. As a result, the firm would appear to justify its low price to earnings (P/E) rating. There is plenty of room for disappointment, and even if the UK avoids a no-deal exit falling confidence and lower consumer lending will hit performance. 

From a share price perspective, the optimistic view is that the price has held 56p as support. If this remains in place then a possible low may have been formed, as the price works off some of the excessive optimism of the December-April rally. But a no-deal Brexit could see the shares drop sharply, changing the outlook for the shares and reinforcing the bearish view. 

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