The performance of the Lloyds Banking Group PLC (LON:LLOY) (LLOY.L) share price has continued to disappoint in recent months. Investors appear to be factoring in further uncertainty for the bank as the Brexit process draws towards its conclusion.
I wouldn’t be surprised if further volatility is ahead for the bank. At the moment, there is significant uncertainty about how the Brexit process will proceed. In fact, almost anything could happen in the next few months, and this situation is unlikely to foster increasing confidence among investors towards UK-focused shares.
As a result, further difficulties could be ahead for Lloyds in my opinion. Even though it now trades below its tangible book value and has a P/E ratio of around 7, I feel that investors may maintain a downbeat stance on its future prospects – in the near term at least.
Over the long run I believe that the company could benefit from the prospect of rising UK interest rates. They are forecast to increase over the next few years, although this is clearly dependent on the performance of the economy following Brexit. If a tighter monetary policy does come into play, it may provide a higher net interest margin across the banking sector which helps the stock to generate improving financial performance.
Alongside this, I think the Lloyds share price may benefit from the company’s plans to pay higher dividends over the medium term. it is expected to yield over 6% in the current year, with a payout ratio of less than 50% suggesting to me that there could be scope for a more generous shareholder payment in time. This could help to convince investors that the bank is delivering on its strategy and has the potential to generate improving financial performance.
That situation, though, may take time to present itself. In the meantime, volatility may continue to be ‘the norm’ for the bank after what has been a tough few years.