FTSE 100
Lloyds share price declined by more than 2% after the high-street bank unveiled fresh job cuts. The shares ended the day at 27.70p, which is lower than last week’s high of 29.70p.
In a statement released on Wednesday, the British bank said that it would cut 1,070 jobs as part of its restructuring process. These cuts came less than three months after the bank slashed another 865 jobs as it tries to cut costs amid the pandemic. At the same time, it said that it was creating about 340 jobs.
The announcement by Lloyds came a week after it reported a better-than-expected profit. In the third quarter, the bank’s mortgage lending increased by more than £3.5 billion, boosted by the robust mortgage market. The bank is the biggest mortgage lender in the United Kingdom, accounting for about 20%.
According to analysts, the hot mortgage market was mostly due to a government policy that gave a temporary stamp duty holiday.
Lloyds share price also dropped in reaction to the Bank of England (BOE) interest rate decision. In general, the bank did what most analysts were expecting. It left interest rates untampered with and increased its asset purchases. But, the scale of purchases was bigger than expected. It increased the target of purchases by £150 billion.
As the coronavirus pandemic continues and as England remains in a lockdown, there are two main risks for the company. First, the level of unemployment rate will rise, which will lead to higher delinquencies. That means that the bank could boost its loans provisions again in the fourth quarter.
Second, it means that the BOE could be pressured to lower interest rates to the negative zone. Furthermore, the bank has already bought 44% of total UK government bonds. And, some analysts are questioning whether there is an enough room to buy more. In its guidelines, the bank can only buy up to 70% of the debt. Indeed, as we have written before, the BOE has already warned UK banks to prepare for negative rates.
Another risk for Lloyds Bank is that the mortgage market will not remain hot forever. Indeed, analysts expect the sector to slowdown in the next few months. All this leaves Lloyds at a difficult position considering that it does not have a trading division like Barclays.
Still, while risks remain, there are also opportunities for Lloyds. First, there is a possibility that the UK and the European Union will reach a Brexit agreement. That will remove the possibility of a no-deal Brexit, which would be damaging for the UK economy. Second, Lloyds remains relatively undervalued considering that its books are still in a strong position. Finally, the bank could return to giving out dividends once the BOE allows.
The daily chart below shows that Lloyds share price has been embattled for months. It ended the day at 27.10p. It is also below the 50-day and 25-day exponential moving averages. Also, it is above this year’s low of 23.3p.
Therefore, for long-term investors, having a small holding of Lloyds makes sense because of the opportunities we have mentioned. However, in the near term, I expect the price to remain below 30p.
