Sound the alarm! I think this news is another reason to sell Lloyds Bank straight away

Close up of newspaper headline for financial crisis news

If you held shares in Lloyds Banking Group(LSE: LLOY) at the top of the year, and decided to brave it out despite the increasingly bleak outlook for the British economy you’d now be nursing a 20% fall in the value of your holdings.

The challenging macroeconomic and geopolitical backdrop has piled pressure on plenty of FTSE 100 shares this year, and even some of the stocks I hold have endured whopping share price falls in 2018. But I’m not necessarily worried — I always invest with a view to holding stocks for a minimum of five years, and I am confident that those losers have what it takes to rebound over the medium-to-long term.

I’m not so confident that Lloyds has what it takes to recover from these dips however, certainly not in the current climate. The outcome of Britain’s withdrawal from the European Union is the biggest cause of consternation, of course, for the country’s UK-focused banks. And as the episode becomes more and more scary, so do the earnings prospects of the likes of the Black Horse Bank.

More bad news

The growing threat of a destructive Brexit is not the only bad news to hit Lloyds in the past few days, however. Time and again I’ve spoken about the crushing cost of the PPI-misselling scandal for Britain’s banks, and while Lloyds didn’t have to squirrel away any further provisions for the July-September quarter I’m expecting the bills to pick up again very soon.

The upcoming cut-off deadline of summer 2019 has seen many of Britain’s banks hit with a rising stream of claims, and latest figures from CYBG on Wednesday revealed the extent of the problem.

The owner of Clydesdale and Yorkshire Banks was forced to swallow an additional £150m charge in anticipation of additional claims in the months ahead. And things could get even worse should the Financial Conduct Authority follow through on its most recent threat — to make the banks write to around 150,000 claimants who have already had their claims rejected, advising that their cases could be reopened.

The threat of increasing misconduct charges is especially problematic for Lloyds since the strength of its balance sheet has come under recent fire. According to European Banking Authority stress tests published this month Lloyds is one of the worst-capitalised institutions on the continent, with a core capital ratio of around 6.8% through to the close of 2020 under so-called adverse conditions.

6% yields? Who cares?

This clearly leaves the bank with little room to manoeuvre should Brexit indeed hammer business performance next year and beyond. Needless to say it also puts Lloyds’ dividend outlook, for so long a serious attraction for many share investors, in serious doubt.

Everyone knows it’s lifted dividends at a ripping rate since reinstating the dividend a few years back, and City forecasters are expecting further progress in 2018 and 2019 as well. A 3.3p per share reward is anticipated for this year and a 3.5p one for the next period, figures that yield a stunning 6% and 6.3% respectively.

At the current time though, I think investors should take these projections with a pinch of salt though. In my opinion, there’s just too much risk facing Lloyds at present, and the chances of it disappointing in terms of both earnings and dividends are high. And I’d be very happy to sell out of the bank at this point in time.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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