Lloyds Banking Group Plc is within touching distance of putting behind it a scandal that has cost a breathtaking 21.8 billion pounds ($27 billion). But any celebration would be premature: The lender is, in effect, one of the biggest bets on Brexit Britain.
On Monday, Lloyds said it would suspend a share buyback after setting aside an additional 1.8 billion pounds to compensate customers who were sold payment protection insurance they didn’t need or want. The announcement wasn’t a huge surprise: Its rivals had already signaled a spike in last-minute claims after regulators gave consumers until the end of last month to claim redress — using a puppet Arnold Schwarzenegger to publicize the deadline.
The end of the costliest scandal in the history of the British banking industry is unlikely to prove a turning point. Banks still face the most uncertain political situation in a generation, and there’s little their managers can do to prepare for what may come next: a no-deal Brexit or an election victory by Jeremy Corbyn’s Labour party.
Analysts at Citigroup Inc. estimate that in the event of a no-deal Brexit, U.K. loan growth would drop in line with a likely economic contraction, cutting British bank earnings by as much as 9%. A possible decline in interest rates would also eat into profit and the big unknown — the pace at which loan losses would build up — would further erode income.
Add to the uncertainty a potential election and Labour victory. In addition to policies that would affect the economy broadly — handing 10% of companies to employees, increases in corporate taxes — the opposition party also envisions changing the law to stop banks from shuttering branches. Cutting costs by closing outlets has been at the heart of Lloyds’s restructuring under Chief Executive Officer Antonio Horta-Osorio.
To be sure, British Prime Minister Boris Johnson may yet clinch an agreement with the European Union on Brexit, and a Labour election victory may not materialize.
Yet the risks to Lloyds appear to be near acute: U.K. consumer and commercial lending accounts for more than three quarters of its assets, and its insurance and wealth businesses are also largely domestic.
Since the Brexit referendum, Lloyds’ shares have dropped about 31%, under-performing both the FTSE-100 Index — which is up 15% — and the FTSE 350 Banks Index.
Without a crystal ball, quantifying the cost of Brexit to the country remains tricky at best. The Bank of England now expects the peak-to-trough hit to GDP to be about 5.5.
Many see value in Lloyds — 90% of analysts recommend buying or holding the stock. At around 13% return on equity and a price to book of 0.8 times it isn’t a commanding valuation. But the threats of Brexit and a Labour government may be even more painful than the damage inflicted by a plastic strongman.
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Elisa Martinuzzi is a Bloomberg Opinion columnist covering finance. She is a former managing editor for European finance at Bloomberg News.
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