There’s no arguing that Lloyds Banking Group (LSE: LLOY) has made tremendous progress since the 2008/9 financial crisis, and at 68p its shares have tripled in value from the darkest days.

On a host of other measures, Lloyds now rates as one of the best big banks in Europe. Furthermore, dividends have resumed — indeed, the bank announced a surprise special dividend in its results in February — and management has talked about returning as much as £25bn to shareholders in the next few years, through dividends and share buybacks.

Heck, even renowned banks sceptic Neil Woodford has conceded that Lloyds is “much improved and arguably more investable than at any stage since the crisis”.

Here at the Motley Fool, it’s rare for the numerous writers to be uniformly positive on a stock, but to a greater or lesser degree that seems to be the case with Lloyds. I’m in the bullish camp, too, but today I’m taking a step back to ask if, in the midst of all the positivity, now could actually be the worst time  to back the Black Horse.

Into the abyss

There’s an über-bear case that stock markets are on the brink of a massive crash. I won’t go into detail, but most of the ultra-pessimistic arguments stem from the idea that the huge and unprecedented fiscal experiment the world has been engaged in since 2008/9 is set to fail and that the chickens will come home to roost.  

Of course, if we are on the brink of a rout to rival the Wall Street Crash of 1929, now would indeed be the worst time to buy Lloyds — or any other stock, for that matter. But even in the absence of a catastrophe for equities in general, is Lloyds vulnerable to more specific risks that might make it a poor choice for investors compared with other banks and other industries?

Property crash

A property crash or severe correction would hurt Lloyds in particular, because of the extent of its exposure to the UK housing market. With 20% of the UK mortgage market and mortgages accounting for 70% of all its customer loans, Lloyds has no geographical diversification or investment banking business that could potentially offset or mitigate the adverse effects of a UK housing slump.

For Lloyds, such a slump would, I believe, as Neil Woodford has put it, “shatter the consensual view that its balance sheet is rock solid”.

While Lloyds has had no problem getting through the bank stress tests, these are all about mere survival in adverse circumstances, not about a capability to flourish. If there were to be a property crash tomorrow, investors could wave goodbye to the talked-about £25bn return to shareholders in the next few years — and maybe to any dividend at all, with, among other things, PPI compensation still running and probably accelerating before a 2018 claims deadline.

As well as a dividend disappointment — and the dividend is the attraction for many investors — a serious slump in the share price would be inevitable, as the shares are currently trading at a premium to the bank’s net asset value.

Looking on the bright side

There are few indications that a severe property market correction or crash is imminent. We can point to chronic housing under-supply and low interest rates as supportive of prices for a good few years at least.

And in a few years time, Lloyds will be an even stronger and more efficient bank, the remaining riskier run-off assets will have been disposed of, legacy issues will be behind it, and the Black Horse will be in peak condition to face occasional bouts of housing market turmoil that are inevitable from time to time.

On this bullish view, now is very far from being the worst time to invest in Lloyds. Indeed, it could be a great time to buy yourself a slice of the business.

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G A Chester has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.