The Lloyds Banking Group (LSE: LLOY) share price continues to go from strength to strength. It’s risen a third during the past 10 weeks as Britain has prepared to ease Covid-19 restrictions, boosting hopes of a strong profits rebound at the FTSE 100 bank.
In fact, the Lloyds share price has just closed at its highest level since late February 2020. It’s now up around 15% during the past 12 months. Still, I’m not tempted to buy this UK banking share for my own shares portfolio. One reason is because I think low interest rates are here to stay. Its a problem that’s hammered banks’ profitability for more than a decade now.
Interest rate fears
A recent note by analyst Laith Khalaf of AJ Bell sums up my fears perfectly. He says that “the only thing that might prise rates upwards is a bout of inflation.” And he adds that inflation “would need to be both sustained and structural to compel the Bank of England to tighten policy.” Something that doesn’t appear to be on the horizon.
Khalaf also says that the BoE “will look through rising inflation caused by temporary factors, such as recovering energy prices and would only deem inflation to be problematic if the UK was near full employment.” He reckons that this “isn’t going to happen this year, or probably next” either.
Rock-bottom rates might be the main reason why I’m not attracted by the Lloyds share price today. However, the potential for a third wave of Covid-19 infections coming down the tracks as vaccine-resistant strains emerge makes me nervous too. It’s a situation that’s happening in Europe and further afield. And it’s one that would prompt more eye-popping bad loans provisions at Lloyds and derail a revenues recovery.
There’s also the possibility that corporate casualties in Britain could soar when government support programmes end. This could unleash an economic meltdown that might inflict serious long-term damage on Britain’s banks.
Lloyds’ share price: too cheap to miss?
Of course, no UK share is completely without risk. And fans of the FTSE 100 bank would argue the above dangers are reflected by the Lloyds share price. Sure, it may have soared in recent weeks. But, right now, it still trades on a price-to-earnings growth (PEG) ratio of 0.2 for 2021. Any reading below 1 suggests a stock might be undervalued by the market.
Still, the PEG ratio is based on City expectations that annual profits will rebound 300% in 2021. It’s a reading I think is at risk of downgrades, something which would likely pull the Lloyds share price lower again.
Bulls would point to the company’s insurance and wealth management businesses as reasons to look on the bright side. They might point to the company’s huge focus on mortgages too. This could also continue to pay off as the housing market remains robust. But, personally speaking, I’d rather buy other UK growth shares today.
