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Is the Lloyds share price too cheap to ignore?

A brochure showing some of Lloyds Banking Group's major brands
Image: Lloyds Banking Group

The Lloyds Banking Group (LSE: LLOY) share price has continued to trend lower in recent weeks. Since hitting post-pandemic highs of 50p per share in early June, investor appetite for the FTSE 100 bank has slipped as fears over the Covid-19 crisis have grown. The penny stock was last trading around the 43p per share mark.

It’s worth remembering that the Lloyds’s share price is still 60% more expensive than it was a year ago. And it’s possible that dip buying from long-term investors could help the bank bounce again. Lloyds shares certainly look cheap on paper. The Footsie firm trades on a forward price-to-earnings (P/E) ratio of around 6 times. It also packs a chubby 5% dividend yield for 2020.

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Reasons to buy the FTSE 100 bank

There are several good reasons why some UK share pickers think the Lloyds share price will rebound sharply. These include:

1) The strong housing market

Low interest rates and government help for first-time buyers are likely to keep home purchases — and consequently activity at Lloyds’s mortgage lending arm — rattling along nicely. Lloyds is the country’s biggest home loans provider with some 20% of the market.

House purchase lending volumes hit their highest level on record in June as buyers rushed in before the stamp duty holiday expired. And Nationwide data more recently shows that home prices bounced around £5,000 in August following a dip the previous month. This suggests that the housing market will remain strong even as full-fat stamp duty returns.

2) Bright GDP forecasts

The UK economy is predicted to record strong and sustained growth over the medium term at least. This has the potential to lift Lloyds’s earnings steadily higher into the middle of the decade. The International Monetary Fund for example thinks that the British economy will expand 7% and 4.8% in 2021 and 2022, respectively, giving cyclical UK shares something to be encouraged by.

Why I’m not tempted by the Lloyds share price

There are clearly reasons to be optimistic about the Lloyds share price. To my mind, though, the risks facing ‘The Black Horse Bank’ remain too significant for me to invest.

Firstly I’m concerned about a raft of recent data that shows the UK economy begin to struggle for traction again. Latest services PMI clocked in at 55, plummeting almost five points from July. This is a big deal because services make up around 80% of the domestic economy. The bad news could keep coming, too, as Covid-19 cases continue to rise.

It’s possible that the Bank of England will have to keep interest rates lower for longer, too, to compensate for another severe slowdown. This may help Lloyds’s mortgage business but overall it’s bad for banks — it makes it more difficult for them to make money through lending.

Finally, as a long-term investor I’m also turned off by Lloyds’s lack of overseas exposure compared with peers like Barclays and HSBC. This is likely to significantly hit profits growth and with it Lloyds’s share price performance. For these reasons I’d much rather buy other UK shares right now.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays, HSBC Holdings, and 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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