Something to spice up Lloyds?

Wednesday, 31st July 2019 08:33 - by Shant

News today broke of the Lloyds Banking Group fending off competition in the bid to take over the mortgage book from Tesco bank.  Earlier this year - in May - Tesco announced that it was to cease new lending to customers due to challenging market conditions and that it would sell off its existing loans.  The current book carries 23,000 mortgage holders and up until recently, Santander was poised to snap up the £3.7bln portfolio with RBS hot on its heels, but it seems Lloyds has won the race to secure preferred bidder status and is set to hold talks with the supermarket giant imminently.  

This may be seen as a bold move in the current climate, with the UK not only facing the spectre of a disruptive departure from the EU this year, but with global interest rates heading lower as the economy the world over is in a clear slowdown as we have seen more prominently in Europe as well as to varying degrees throughout Asia. The UK may also be forced to surrender to lower interest rates despite strong wage pressures coming through, and inflation also holding up - and indeed set to rise given the latest fall in the Sterling exchange rate.  Banking margins (and revenues) are therefore set to come under further pressure, though this acquisition - should it succeed - would give Lloyds (or any bank) increased volumes of what are termed as prime mortgages.  The assumption here is that the risk profile would at the very least be maintained, though leverage and default risks going into the Brexit endgame could prove challenging.  That said, the competition for Tesco's loan book suggests these concerns are limited in spite of the UK risks ahead. 

For Lloyds, the acquisition would be a major coup, with the bank having reduced its investment banking division some years ago and choosing to rely more heavily on its commercial bank.  Clearly, this is something which has seen the rest of the banking world following suit at various points in the not too distant past, with Deutsche bank the notable protagonists in this dynamic more recently.  

However, the news has failed to help stem the fall in Lloyds share price, and while losses have been aggressive alongside the rest of the UK banks this week, any potential improvement in the Brexit process - which seems unlikely at present - could see prices offering decent value with today's news in mind.  The share price was trading above 66 pence in late April but is now down eyeing a move below 55 pence.  Technically, we see support ahead of 50 pence a share, but chartists will point to the 46-48 pence area as critical, representing levels below those seen at the end of last year during the global sell-off in equity markets.  Gilt yields have also taken a hit today, adding to banking stock woes.  Markets have been brushing off some of the hawkish talk from BoE members in recent weeks and the developments in the Brexit saga have clearly undermined the MPCs skew towards modest rate normalisation.  This should keep banking shares on the defensive, but Lloyds could potentially see some modest outperformance on today's news, as it takes a big step closer to grabbing a greater share of the mortgage market. 

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.