Lloyds of London making multi-year lows on Covid-19 worries, reports Fiona Cincotta.
Lloyds Banking Group’s (LLOY (LSE)/LYG (NYSE)) share price has dived by as much as 9% in early trade as the UK’s largest retail bank plunged into a loss in the second quarter and warned on the outlook.
- Lloyds reported a pre-tax loss of £676 million ($884 million) in Q2 compared to a pre-tax profit of £1.3 billion ($1.7 billion) a year ago.
- Revenue fell 21% year-over-year to £3.5 billion ($4.58 billion) as lower demand and lower interest rates hit income.
Bad loan provisions
Expectations were low heading towards the release of Lloyds results, but the sheer size of the amount that Lloyds is putting aside for bad loans is nothing short of worrying.
Lloyds put aside a bigger than expected £2.4 billion ($3.14 billion) for bad loan provisions up from £1.4 billion ($1.83 billion (in the first quarter. This impairment charge eats directly into profits. Provisions for soured mortgage loans had been excluded from Q1 but they have been included in Q2 amid fears of the impact of high levels of unemployment.
Whilst the government is supporting the labor market through the job retention scheme currently, that support will be weaned away over the coming months, which will mean that the impact of the Coronavirus pandemic will start to show through in rising unemployment and consequently mortgage loan default.
Larger than expected bad loan provisions have been prevalent in major banks throughout Europe with rival Barclays reporting a larger than forecast £1.6 million provision and Santander following suit.
Net Interest Income
Net interest margins, which measure the profitability of lending sunk by a whole 20 basis points to 2.59% in Q2 after the Bank of England slashed interest rates to 0.1% and as demand for loans and mortgages evaporates.
Outlook
As the UK’s biggest domestic bank, Lloyds is considered a bellwether for the wider UK economy. The fact that Lloyds has warned that the impact from coronavirus was worse than forecast and that the bank has adopted a gloomier outlook doesn’t bode well.
Lloyds is now modelling for a worst-case scenario of -17.2% GDP contraction this year compared to just -7.8% modelled in Q1, although the baseline case of -5% GDP contraction remains unchanged.
Dividend
Given the perfect storm that Lloyds is facing the chances of its dividend being re-instated anytime soon are looking weak at best.
Chart thoughts
Lloyds plunged by as much as 9% on the open following the release, hitting an eight-year low of 25.7p (see chart below).
The share price trades firmly below its 50-, 100- and 200-day moving averages and below its ascending trendline in a clearly bearish chart.
Immediate support can be seen at Thursday’s low of 25.7p before 24.7p the low from May 2012.
On the flip side, a break above today’s high of 26.1p could open the door to 30p the trendline and psychological resistance level.
Fiona Cincotta is a Market Analyst for Currency Live
