Is the Lloyds Banking Group (LSE LLOY) share price too cheap to ignore at current levels? Or is the FTSE 100 stock simply one of those classic investment traps?
Well, the Lloyds share price certainly packs some eye-popping value on paper. For 2021, the bank trades on a forward price-to-earnings (P/E) ratio of just 6 times. Furthermore, at recent prices of 42.6p per share, Lloyds carries a mighty 5.3% dividend yield for 2021.
Despite this cheapness however, I’m still not prepared to buy Lloyds shares. Here are three reasons why I’m steering clear of the bank today.
1) Economic forecasts begin to fall
Britain’s economy was one of the developed world’s star performers in the first half of 2021. It’s a rise that reflected a strong start to the government’s Covid-19 vaccination programme. And it naturally led economists to tip a strong economic rebound for the full year.
However, forecasters have been much more bearish on the economic outlook as supply chain issues weigh and coronavirus rates tick up again. Bank of England chief Andrew Bailey told MPs on Wednesday that the rebound is showing signs of “levelling off.” Predictions like this suggest that Lloyds could face renewed revenues strain and a fresh upswell in bad loans.
2) Will the housing market cool?
The UK housing market has thrived over the past year, in turn lighting a fire under income at major lender Lloyds. I’m of the opinion that the market will remain strong too. Government help for first-time buyers through Help to Buy schemes are set to continue. I think low interest rates will continue too, as the Bank of England will seek to help the economic recovery.
But, of course, there’s always a risk that the housing sector could hit a speedbump. Indeed, data from the Royal Institution of Chartered Surveyors shows that home sales in August fell for a second consecutive month, prompting me to sit back and take note. The steady reintroduction of Stamp Duty and the aforementioned economic slowdown could dent homebuyer interest in the months ahead too.
3) Competition is intensifying
Lloyds’ share price also faces significant long-term uncertainty as the popularity of challenger banks surges.
Digitally-focussed and smaller, more agile operators like Monzo and Revolut are grabbing customers from established operators at a staggering rate. According to the BDO, total lending from these new-age banks leapt 11% in 2020 to a record £143bn. Lloyds will have to invest heavily in its products and their platforms to try and stem the tide.
My verdict on Lloyds’ share price
Fans of the FTSE 100 bank might argue that the Bank of England will raise interest rates in 2022. And this will give the Lloyds share price a boost as it’ll help banks make bigger profits from lending. They also could point to the firm’s strong balance sheet and what this could mean for future dividends.
They could prove me wrong, but I believe the risks to the bank’s bottom line far outweigh these bullish points. And so I’m happy to ignore the Lloyds share price, despite its cheapness.
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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.