What Is Plaguing the Lloyds Banking Group’s Share Price?

Lloyds Banking Group Plc, which trades as a part of the FTSE 100 Index of the London Stock Exchange market is a blue-chip stock but has hardly been considered to be a growth stock by many investors. One probable reason could be that though the company is well established but operates in the Banking and Financial Services sector, which, to a large extent is now mature and hence the opportunities for a significant growth through capital gains are limited. The company till about a year ago, has been providing consistent returns, and since the 2008 Financial and Mortgage crisis, has not really seen any challenges in the stock market, up until late February 2020 and early March.

Despite the limited opportunities of growth, the company’s stock price has remained consistent, and along with that, decent dividend pay-outs have kept the investors and shareholders to stick with the stock and maintain its capital flow.

Recently, in the latter part of February 2020, the stock price of the company started falling drastically, and while the market’s view for the first few days was that the price might be dropping along with the overall market sentiments, but the scenario changed as there were no signs of recovery, even with the overall market displaying several bouts of recovery at certain times. The following is a brief analysis of the company and what could be the potential reasons of the price crash of the company’s share on the market.

Company Background

Lloyds Banking Group Plc (LON:LLOY) is one of the United Kingdom’s largest banking and financial services companies and is a key entity in providing growth and spurring the British Economy forward, since its inception in the year 1986. The company provides financial solutions to both individual, as well as commercial clients, through an extremely broad spectrum of products and services, which are primarily divided into three core business segments – Retail Banking, Commercial Banking, Insurance and Wealth Management. It also has auxiliary and internal functions such as Risk Management, Financial Management, Audit, Corporate Affairs, People’s management as well as Legal and Compliance. The company provides its services through a number of well-established brands in the banking sector, the likes of which include Lloyds Bank, Halifax, Bank of Scotland and Scottish Widows, as well as through a wide spectrum of various distribution channels. The following is a brief description of the company’s operations through its business segments.

• Retail – Through the retail division of the company, it provides products and services such as Current Accounts, Savings Account, Credit Card, Personal Loans, Mortgages, Motor Finance as well as a pool of services in the insurance domain to individuals and families.
• Commercial Banking – The commercial banking operation of the group includes providing services and finances to business organisations, with a prime focus on the companies based within the United Kingdom, to support and spur both financial growth of these institutions as well as the economic growth of the company.
• Insurance and Wealth Management – Through this segment, the company supports around 10 million Individuals by providing services such as savings management, retirement planning as well as investment management and real estate planning, tax planning, as well as providing personal lending.

Story Behind the crash of the share price of the company

Despite the fact that Lloyds Banking Group is considered a safe stock in terms of returns, its price fell quite drastically in the last week of February and kept on falling in the first week of March as well. There could a number of reasons behind this bear run of the stock, to start with, Lloyds Banking Group had to endure a lot of challenges since last August with the Payment Protection Insurance (PPI) claims repayments. It was reported that the company had to cut down estimates on the guidance of its full-year results due to the number of claims exceeding the company’s expectations. The company had previously reported that the number of claims it was receiving on a weekly basis, was approximately 120 per cent higher than its expectations, and hence, there could be a variance between its guided and actual results for the year ending 31^st December 2019.

During the beginning of the year, the company announced that it would have to cut bonus payments to about 60 thousand of the company’s employees, owing to the losses endured as a part of the PPI Claims repayment during the previous year. Lloyds 'remuneration committee, which decides on the final sum of the bonus payments, had set aside £ 464.5 million to be paid in 2019 to staff and top executives. However, the year 2020 compensation figure was projected to be lower for the first time since 2016. Not only this, the pay-out figure for the year 2020 was also expected to fall for the first time since 2016.

This was followed by the beginning of an extremely tense period, the coronavirus outbreak. The Covid-19 pandemic led to a halt in all economic activity in the country, and the Bank of England and the Treasury department called out the banks to be at the forefront of the fight against the economic impact caused by the Coronavirus. The company had to make it’s Lending more flexible for this period and was supposed to lend out to small businesses as well as individual’s as a part of the Lending scheme announced by the Government of the United Kingdom.

The final nail in the coffin for the shareholders of the company was the advice of the European Central Bank and the Bank of England’s orders for the Banks to defer on Dividend Payments and Bonus payments to its shareholders, the banks were also asked not to go for any share buybacks during this period. This probably led to a mass sell-off of the company’s stock, as stated earlier, a large number of company’s investors rely on the company’s decent dividend payment as an alternative income, especially the retail shareholders. In its final results for the year ending 31^st December 2019, the company’s board had proposed a final dividend of GBX 2.25 per share, which was supposed to be paid in June 2020. After the Bank of England’s announcement, it was reported that the June Dividend payment would be deferred to a later date so that the company can maintain liquidity and provide support to UK businesses in this extremely difficult time.

The above-mentioned reasons could have been what contributed to the company’s share price downfall and the loss of the shareholders’ wealth and confidence on the stock, and hence, it remains to be seen if the company would be able to post a recovery on the London Stock Exchange market, by the time this pandemic is contained in the United Kingdom, because its not the only reason that has been plaguing the stocks since late.

LLOY Stock Price Highlights

(Source: Thomson Reuters, on 06-04-2020 before the closing of the London Stock Exchange Market)

As on 6^th April 2020, at 08:15 A.M Greenwich Mean Time, at the time of writing this report, the Lloyds Banking Group Plc share was hovering at a price of GBX 29.18 on the London Stock Exchange market, stronger by approximately 5.23 per cent or GBX 1.45, in comparison with the price of the share on the previous trading day, which had been reported to be at GBX 27.73. Lloyds Banking Group Plc's market capitalisation has been recorded of GBP 19.688 billion at the time of reporting.

In the previous year, after April 08, 2019, when the share was at a price of GBX 62.62 at the time of market closing, the Lloyds Banking Group Plc share had yielded a negative return of around 53.40 per cent in value. The share of the company has also yielded a negative return of approximately 36.12 per cent in value in the previous month after market closing on March 06, 2020, when the share price at GBX 45.68 per share. The stock’s beta stood at 1.30, higher than the comparative benchmark index.

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