Banking stocks are my least favourite investments in the FTSE 100, so can Lloyds Bank (LSE:LLOY) convince me otherwise? Year-to-date the Lloyds share price has climbed 19%, a big improvement on last year’s 42% drop. But it’s now pulling back again so investor momentum could be slowing.
FTSE 100 optimism remains
First, the pluses. The UK economy is beginning to bounce back and the FTSE 100 along with it. And retail footfall is rising faster than after the summer 2020 lockdown ended, with even central London finally feeling the benefit. This is encouraging and bodes well for FTSE 100 stocks. And if consumers are spending, the economy thrives and banks earn more on lending. This could be a reason for UK investors to stick with Lloyds.
The group has a strong domestic focus. This can be a disadvantage when its peers are raking in profits from their overseas ventures, but it can prove positive when the UK economy is strong. With signs of economic recovery, some investors are happy to wait it out in hope the Lloyds share price will soar.
Also, if inflation leads to rising interest rates in the years to come, then banks could be in a much stronger position. But as my colleague Royston Wild points out, low interest rates could be here for a lot longer yet.
Lloyds banking on mortgage lending
Lloyds has a big mortgage division. Housing is an area in which it can thrive as long as the sector doesn’t slump. Nationwide recently said that during the past decade, the average property price for a first-time buyer has risen by 41%. But young people are still struggling to get on the property ladder, so to entice this age group of 25- to 34-year-olds, better mortgage options will need to be made available.
Lloyds is among a group of UK banks that will offer 5% deposit mortgage lending after the UK Government agreed to guarantee the scheme. This is great as long as employment levels recover and people can afford to pay their mortgages.
Debt, Covid, and crypto
In the throes of the pandemic, banks had to keep massive reserves aside to cover potential bad debts. So, there’s hope this will be reversed in the coming year. In the past week, US banks releasing earnings showed big gains after a dire 2020. Likewise, analysts expect a similar turnaround for UK banks. It’s already reintroduced its dividend with a 1.3% yield.
Nevertheless, Covid-19 is still rampaging across the world along with concerns that vaccines may not work against new strains. Cautious optimism is key because we don’t have much certainty over the future of the UK economy just yet.
Plus, cryptocurrency is putting pressure on central banks to bring out a digital currency of their own. The digital euro has been mentioned. As has a ‘Britcoin’ or digital pound. How this will come to affect UK banking stocks remains to be seen. But it’s clear the financial landscape is changing, and I’m not convinced the big FTSE 100 banks carry the clout they once did.
Since the 2008 financial crisis, Lloyds’ track record has been poor. While in 2015 it rose above 80p for a short time, it’s never returned to those levels. Considering the pros and cons, I’m still not taken with Lloyds shares. I think there are better alternatives in the FTSE 100 offering more long-term value.
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Kirsteen 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.