What a difference a week makes.Lloyds Banking Group (LSE: LLOY) was a largely blameless victim of the recent share price sell-off but it has rebounded 10% in the last week to hit around 62p at time of writing.
Bargain bank?
Im glad that it has recovered given that I named the bank mytop FTSE 100 stock tip for 2016. Not that I was overly troubled by the slump. We atthe Fool are drilledto view a stock market rout as a great chanceto load up on our favourite stocks at bargain prices, and this looked like aclassic of the type.
The market sell-off was largelytriggered by trouble in China and growing fears of a European banking crisis,rather than concerns about the UK banking sector. But that doesnt mean Lloyds and the other big banks have their hands clean. UK bank stocks fell 20% because they still havent fullyrepairedtheir balance sheets, and some fear theyremain vulnerable to contagion from the continent. Yet with acommon equity tier 1 ratio of a solid 13.7% lastSeptember, Lloyds is better positioned than most.
One big negative
The global trend towards negative interest rates is a growing concern however. As my Foolish colleague Owain Bennallack recently pointed out, Lloydshas done a decent job of rebuilding its net interest margins over the past few years but would be crushed by negative interest rates.
I dont think the Bank of England will go negative: it refused to cut rates below 0.5% because of the damage that would do tobuilding society deposits. Negative rates would be a big step and a sign thatBank policymakers havelost the plot, especially if they prove ineffective elsewhere. Deputy governorSir Jon Cunliffe recently warnedtheassumption that rates wont rise until 2019 and might evenbe cut werent backed by economic fundamentals. But the possibilityofnegative rates certainlyadds an extra element of risk forbuyers of Lloyds shares.
The peoples bank
Repairing the damage of the financial crisis has been a far longer job than anybody could have imagined. Lloyds isstill struggling to cast off the shackles of past misdemeanours and further PPI mis-selling provisions cantbe ruled out. Chancellor George Osborne hadhoped to be spearheading a peoples flotation at the moment, but that remainson ice with the share price still wellbelowthe taxpayers break-even price of 73.6p.
Predictions are notoriously difficult, especially about the future of banking stocks, and youshouldnt wholly rely on forecasts that the stock will yield 5.1% by the end of this year, up from todays 1.2%.We shouldknow more about the dividend when Lloyds publishes anupdate on Thursday. Faithful investors are putting their trustin a return to the dividend machine of yesteryear, butthe recent sell-off has given scopefor share price growth as well.
I still believe Lloyds is a buyfor patient investors, but the road ahead remains long and troubled. One day,this should be a low-risk domesticplayagain, but thats hard to imagineright now.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
