Ten iconic UK shares: Lloyds

The next of our series of articles using fundamental analysis to examine the prospects of 10 iconic FTSE companies.

Lloyds sign
Source: Bloomberg

Reasons to watch

  1. Further cuts to branch network and staff jobs.
  2. Continuing uncertainty over dividend payments.
  3. The rise of the challenger banks and their impact.


A pillar of the City of London, Lloyds traces its history back to 1765 when the first branch was opened in Birmingham. The black horse device that has become the company’s logo goes even further, to 1677, adopted by goldsmith Humphrey Stokes as a sign for his shop.

The bank’s expansion began in earnest in the early 20th century, with Lloyds eventually ending up as one of the four largest clearing banks. An attempt to buy the forerunner of today’s Barclays bank was struck down by the UK competition authorities, while in 1972 Lloyds was one of the founder banks that created the Access credit card.

However, Lloyds is now primarily known for its takeover of HBOS during the crisis of 2008. It meant that the relatively secure Lloyds bank suddenly acquired another firm that was in real danger of collapsing, severely damaging the financial position of the group as a whole and requiring a massive government bailout. Since then it has steadily cut back its pre-2008 empire, including the sale of some TSB branches, to form a new bank. 

Fundamental analysis*

Lloyds shares fell after the release of its latest earnings update, having dropped after the results of the eurozone stress tests. The bank confirmed its plans to cut 9000 jobs, but it was the announcement that it was still in discussions with the regulator regarding dividend payments that spooked the market. Investors had hoped this would be almost a done deal, and the sense that there is still more to be done will deter the income-hunters from looking afresh at Lloyds. News of another £900 million mis-selling charge is not a surprise, but it will be another disappointment for those that were hoping the bank had put such things behind it.

The recent ECB stress tests did not go well for Lloyds. Of the four UK banks that ran the gauntlet of the tests, Lloyds was the one recorded the lowest score. Although it passed, this ignited concerns that the bank would face increased difficulties in its quest to restart dividend payments. However, the broad outlook still a positive one. The bank is expected to return to profitability this year – a strong sign – while dividend payout plans look robust. Originally the bank was planning to pay around 65% of profit as a dividend during 2016. This might now be cut back to appease regulators both here and in the eurozone, but even a lower ratio would still represent reasonable value.

News of fresh job cuts will be of concern, but these are smaller in number than the massive redundancies that took place following the financial crisis. In the future, an increase in online transactions will see a reduced need for bank branches, so the Lloyds move is arguably just the first of many we will see from the sector.

One area of concern remains the housing market. UK house prices, even excluding London, still remain at a high level versus the average salary. Lloyds has around a third of the new homes market, and the drop in new home building, to its lowest level since the post-WW1 period, is a worry. A drying up of new mortgages would be a potentially significant hit to the bank’s income, while the new challenger banks are also looking to snap up what new mortgages there are.

Valuation levels currently do not look particularly compelling for Lloyds, with other major banks perhaps offering better value. It trades on a lower forward PE than its state-backed peer RBS, at 10.11 versus 11.25, but is more expensive on a current price-to-book multiple than the other big four banks. One point of optimism is the higher return on equity metric, at 10.3% for Lloyds versus 4.4% for RBS, 4.7% for Barclays and 9.4% for HSBC.

Lloyds shares have traded in a tight range since April, moving between 70p and 80p and, indeed, since July sellers have pushed the price downwards whenever it nears 78p, and buyers have returned when it reaches 71/72p. It will take a significant turnaround in sentiment to see the bank move back to the 2014 high around 86p, and until then investors should perhaps look elsewhere. 

*What is fundamental analysis?

Fundamental analysis seeks to examine a security by measuring its value through the use of financial and qualitative factors. Essentially, fundamental investors believe that each share is a piece of a company, and that the company can be analysed to determine whether the current share price indicates whether the company itself is undervalued (trading at a discount) or overvalued (trading at a premium).

The overall objective is to determine the underlying value of a company, and use comparisons with similar companies to determine if the business is likely to be successful or otherwise. Crucially, a company cannot be overvalued or undervalued in isolation. Instead, fundamental analysis compares a company to its peers in the sector, to the broader market, and to past valuations, to determine whether the current valuations are appropriate. 

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