Lloyds Banking Group (LSE: LLOY) has faced its problems, but the Lloyds share price has performed terrifically in recent months. The FTSE 100 bank has risen 30% in value during the past three months and, indeed, the past year.
The share price has risen as a slew of positive updates on the British economy have come in. And that’s no coincidence given that the UK banking share’s fortunes are tied so closely to a strong domestic economy. Goldman Sachs now thinks economic activity on these shores will rise 7.8% in 2021. This not only smashes the US bank’s previous growth estimate of 7.1%. It also beats the 7.2% increase Goldman Sachs has pencilled in for US economy.
Reasons to worry
As the good news keeps on coming it might be natural to think that the Lloyds share price will keep on soaring. I certainly wouldn’t rule out more share price gains in the short-to-medium term. But I’m afraid I won’t be buying the FTSE 100 bank for my own Stocks and Shares ISA.
I won’t buy Lloyds according to how I think its share price will perform in the near future. I buy UK shares according to what shareholder returns I expect to receive over a period of years (say a decade, or more). And, quite frankly, I’m not convinced that Lloyds will be able to cut the mustard.
Among my concerns are the threat that the Bank of England will keep interest rates locked around record lows. Don’t forget that Threadneedle Street’s benchmark rate sat well below 1% for than a decade after the 2008 financial crisis. Anyone expecting rates to soar within the next few years, a necessary development to deliver decent profits at Lloyds and the other banks, is likely to end up sorely disappointed.
Then there’s the massive inroads that challenger banks are making in the UK banking industry. Consumers are not just flocking to these new organisations because of their exceptional digital services. The likes of Starling Bank and Monzo also offer products which the country’s established banks simply can’t compete with.
And the possibility of weak economic growth in Britain beyond 2021 is an issue for me too. A wave of corporate closures and a surge in unemployment could emerge when Covid-19 furlough schemes end later this year. A fresh surge in coronavirus infections this year or beyond could also hit revenues at Lloyds and cause bad loans to soar again. An economically-uncomfortable post-Brexit period also threatens to hit profits at Britain’s banks.
The Lloyds share price DOES looks cheap
On the plus side, Lloyds’ latest results underlined what it describes as its “very strong capital position.” This could help deliver gigantic dividends that could well drive the Lloyds share price skywards.
There’s also the fact that the share price still looks pretty cheap. The UK bank share trades on a forward price-to-earnings (P/E) ratio of around 11.5 times. While this could also tempt a legion of new investors to buy in, as a long-term investor I think the risks far outweigh the potential rewards.
I’d much rather buy other UK shares for my ISA today.
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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.