Lloyds Banking Group - Where next?

10 June 2015

Lloyds Banking Group – Where next?

Range-trading dream

Shares in LLOY are trading at levels last seen in November 2008. After a sideways 2014 offering several extremely attractive 11-13% range-trading opportunities (see graph later), gains of 23% have already been delivered since January 2015 lows thanks to news of dividend resumption (first time in 5 years; banks used to be some of biggest yielding stocks) and decent Q1 results seeing income investors return having been barred from owning zero yielding stock for so many years. LLOY shares are +16.5% for the month of May alone with demand likely to pick up as banks return to favour having, many believe, ‘served their time’ for past misconduct.

It’s the economy, stupid

The banking sector is an important one, given its strong links to the economy and of course the part it played amid the financial and sovereign debt crisis from which we are still in the process of exiting. What’s more, everyone has a bank account and understands/appreciates at least to some degree the business models of the banks whose shares they are trading.

Quid-pro-quo

With many city brokers touting LLOY shares as worth 100p a pop over a 12-month time horizon, even after the strong gains of late this still suggests at least 14% upside potential. And if you are more of a bear than a Bull, then the downside to recent lows offers an equally attractive opportunity in terms of a 7% yielding short-sell opportunity.

Government stakes; rare but well-done

The Government now owns just under 19% of the bank and earlier pledged to offload the remaining stake over its next 5 year term. Reports are now suggesting an acceleration in 2015 following a re-evaluation in light of the bank’s return to profitability and resumption of its dividend, and there is an emphasis on making shares available to the smaller investor, helping those who likely lost out amid the financial crisis and forced bailouts. While restructuring has already proved fruitful, with the successful demerger and IPO of TSB Banking Group transforming LLOY into a simpler, lower risk and customer focused institution, the story could be one of long term re-rating once released from the shackles of public scrutiny.

Back to the Future?

Could LLOY finally be able to offer competitive remuneration packages to attract and retain the kind of talent that other banks enjoy and help make the big profits that allowed them to be so successful in the past? It’s clear we live in a new world where certain practices are no longer publicly accepted (think PPI mis-selling). LLOY is already the most dented by the mal-practise, having setting aside a whopping £12bn, and having just been fined another £117m by the FCA. Are we closer to the end? Or worse to come?

A self-raising flower?

Having raised £9bn by selling down its LLOY stake already, the deal has been a winner for the government. However, subsequent share sales woth an estimated £13bn may need to be at a discount in order to entice traders which could put a cap on the shares until this overhang is removed. Is now the time to trade in or out?

Lloyds and the wider banking sector

Lloyds and fellow bailed-out peer Royal Bank of Scotland (RBS) have recently been hotly tipped by equity analysts to benefit from a pure Conservative-led government, with Chancellor George Osborne pledging to offload the Government’s stakes in both over the course of this new parliament. Both institutions did well in recent ‘stress tests’ conducted by the Bank of England and media suggestions LLOY could as best placed among UK banks to weather any impending financial tempest.Unlike RBS, Lloyds has announced a long awaited intention to resume dividend payments. Coupled with some bullish analyst recommendations this has put LLOY shares back on the long-list of candidates for income investors.A minor PPI-related blip early in June may add pressure to the shares after recent outperformance, however, the silver lining could be another buying opportunity being created in the process. Can we count LLOY return to full private ownership as a possible ‘trailer’ ahead of a re-privatisation of RBS? Will it follow a similar route to LLOY?The Government will soon begin offloading its stake in RBS. With LLOY having delivered a profit, RBS can afford to be sold at a loss. Investors will likely be studying LLOY now so that they can recognise the opportunities in RBS before anyone else.

The Short-term view

Lloyds Banking Group (LLOY) [Banks, Financials]

Will the price rise above highs of 89p or fall towards lows of 46p?

Source: IT Finance, AlphaTerminal

LLOY shares recently broke out from a 12-month sideways shift. Will this level prove supportive for any pull-back? Will the recent gap-up be filled as technical analysis assumes it will (eventually; there is no knowing when)? Could the shares power on above recent 6.5yr highs?

The Longer-term view

Lloyds Banking Group (LLOY) [Banks, Financials]

Will the share price rise towards all-time highs of 425p or fall towards all-time lows of 13p?

Source: IT Finance, AlphaTerminal

Within the longer trend (here we look over 15yrs) LLOY shares have a way to go before they hit either all-time highs or lows. While unlikely near-term trading targets, a look out this far also serves to highlight the various different trends in place.

Could the uptrend recovery from 2009 crisis lows continue towards 250p and pre-crisis highs?
Will the round 100p prove a near-term hurdle in itself?
Does the trend of falling highs dating all the way back to 2000 mean that Buyers should factor in resistance around 120p?
Could Bears realistically expect downside potential as far as 21p?

Technical levels are key before making any trading decision. Make sure you know over what time horizon you are trading and where your targets sit vis-à-vis the short and long term trends already in place. Knowing these can make the difference between a good and bad trade.

What are the brokers saying?

Latest Broker 12-Month Consensus: 60% Buy, 28% Hold, 12% x Sell

8-Jun, Citigroup, Neutral, TP 93p (U); 1-Jun, Investec, Sell, TP 84p; 6-May, Sanford Bernstein, Market Perform, TP 83p; HSBC, Buy, TP 103p; 5-May, Jefferies, Buy TP 102p (U); Nomura, Buy, TP 95p (U); 21-Apr, Deutsche, Buy, TP 94p; 6-Apr, Macquarie, Underperform, TP 75p; 1-Apr, Morgan Stanley, Overweight, TP 100p; 31-Mar, ExaneBNP, Outperform, TP 100p

Sell (Source: Digital Look, Alpha Terminal, Bloomberg) (U = Upgrade / D = Downgrade)

Share price performance

Source: IT-Finance, Alpha Terminal

Whatever you do, speak to Accendo first

Whatever your analysis tells you – tradable opportunities in LLOY are sure to present themselves in the coming weeks and months. At Accendo Markets, we pride ourselves in providing you with the information you need to come to your own conclusions and trade the financial markets the way you want to. Don’t miss out! Join us now.

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10 June 2015