Lloyds Leads Decline in Banking Stocks Amid Renewed Brexit Fears

Concern that Britain will leave the EU has hit the share price of major banking groups -  in the UK and on the continent 

Karen Kwok 14 June, 2016 | 11:18AM
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Banking stocks led falls in FTSE 100 yesterday, amid concerns that the UK could vote to leave the European Union  in next week’s referendum.  

Yesterday the UK’s blue-chip index FTSE 100 was down 1.2% at 6045 points at closing time. But the UK retail bank Lloyds Banking Group (LLOY) saw more significant losses, falling 3.2%. The stock has lost 10% year to date.

Other banking stocks in the UK also posted slight declines: Barclays (BARC)’s shares were down 0.8% while Standard Charted (STAN) fell 1.1%. Financial service group Hargreaves Lansdown (HL.) also fell 1.6% yesterday while Schroders (SDR)’s shares were down 1.6%.

Despite recent declines in Lloyds’ shares, Morningstar analyst Stephen Ellis said he was optimistic that Lloyds will deliver double-digit return in 2016 - along with a 2016 forward projected dividend yield of 5.8%.

“With noncore assets and government ownership now down to minimal levels, Lloyds is re-emerging as the bank it once was: a strong, conservative, and impressively profitable retail-focused institution,” Ellis said.

However, as Lloyds' business is concentrated in the UK, the company is exposed to the economic forces that sweep through the country. While losses of the bank have stabilised, they could rise if the UK’s economy worse again, Ellis warned. Many fear this could happen if the UK left the EU.

Banking has also been a key UK political target since the financial crisis, and politicians may tax and regulate away all of Lloyds’ excess returns, Ellis added.

Ed Smith, asset allocation strategist for Rathbones agreed, saying in May that as UK retail banks are domestically focussed, they are at risk in the event of a Brexit.

“Those we have talked to unanimously agree that it will be increasingly difficult to do business in Europe if you are not part of it,” Smith said.

Declines on European Financial Stocks

It isn’t just UK financial stocks that have been hit by Brexit fears. Financial stocks were also among the weakest performing stocks in Europe as bond yields continue to slip to new record lows.

The Stoxx Europe 600 Index was down 1.8% yesterday. European bank Banco Bilbao Vizcaya Argentaria SA (BBVA) fell 1.3% while Banco Popular Espanol SA (POP) slipped 4.2%. Shares of Commerzbank AG (CBK) also were down 1.5% while UniCredit SpA (UCG) dropped 1.2%.

European banks have faced a number of headwinds in the past quarter. Within Commerzbank’s Mittelstandsbank division, low loan demand, negative interest rates (which have  pressured deposit margins), and intense competition for market share has caused profits to decline from  €364 million to €209 million -  according to Ellis. However, the bank does plan to pay out a small dividend for 2015, indicating the path forward is improving. The stock is rated as an undervalued stock by Morningstar analysts with a five-star rating.

Banco Popular Espanol is also struggling with negative interest rates and it expects rates to remain negative for some time. The bank expects to report a loss for 2016, but hopes to resume paying dividends in 2017, and reduce nonperforming assets by EUR 15 billion through 2018, Ellis adds. The stock is rated by Morningstar analysts with a four-star rating, indicating it as an undervalued stock. 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Banco Bilbao Vizcaya Argentaria SA9.23 EUR0.00Rating
Barclays PLC262.65 GBX1.43Rating
Commerzbank AG15.59 EUR-1.33Rating
Hargreaves Lansdown PLC1,088.50 GBX0.00
Lloyds Banking Group PLC55.02 GBX-0.72Rating
Schroders PLC311.00 GBX0.45Rating
Standard Chartered PLC959.00 GBX1.27Rating
UniCredit SpA38.82 EUR-0.17Rating

About Author

Karen Kwok

Karen Kwok  is a Reporter for Morningstar.co.uk

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