6 reasons why I LOVE and HATE Lloyds shares!

The Lloyds share price looks ultra-cheap at current penny stock prices. Is it a brilliant bargain or a value trap to be avoided?

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The Lloyds Banking Group (LSE: LLOY) share price held up better than most other FTSE 100 shares last week. But extreme market volatility in 2022 means it remains around 7% cheaper than it was at the start of the year.

On paper, Lloyds’ share price subsequently offers terrific value for money. Its forward price-to-earnings (P/E) ratio sits at just 7 times. This is well inside bargain basement territory of 10 times and under. It’s also below the corresponding readings of other Footsie banks Natwest (9.7 times) and HSBC (8.7 times).

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Lloyds shares also offer income investors some tasty yields at current prices of 43.8p per share. The penny stock’s yield clocks in at 5.5% for 2022, a long way north of the broader FTSE 100 3.6% forward average.

Reasons to buy Lloyds

So should I buy Lloyds today before its share price shoots higher? There are a few reasons why Id buy the banking giant, including:

#1: Interest rates are rocketing. Soaring inflation means that the Bank of England (BoE) is hiking rates rapidly. This is good for the banks as it raises the difference between what rates they offer borrowers and savers. The benchmark just hit 0.75% and it’s widely expected to hit at least 2.5% in 2023. This is almost double the 1.31% Lloyds predicted back in March.

#2: The housing market remains rock solid. Lloyds is by far the UK’s largest mortgage provider. So, pleasingly, homes demand remains solid despite the impact of rising interest rates. High rents and government help for first-time buyers mean that purchasing activity could remain robust as well, keeping property prices (and thus loan sizes) on the up and up.

#3: An ambitious growth strategy. Analysts at Hargreaves Lansdown have described the execution risk of Lloyds’ growth plans as “high.” But the £4bn the bank plans to invest over the next half-decade in wealth management, asset management, pensions and insurance could help to supercharge profits growth.

Why I’m holding back

All that being said, there are several good reasons why I’m worried about investing in Lloyds, such as:

#1: Britain’s cooling economy. Lloyds and its share price are tied closely to the fortunes of the broader economy. With recession risks rising, I worry the FTSE 100 bank will face a growing wave of bad loans and revenues pressure. Government data last week showed the UK economy unexpectedly contracted in March.

#2: Can interest rates keep rising? There’s a risk that worsening economic conditions will limit the BoE’s ability to keep aggressively increasing interest rates. Moreover, the outlook for rates has become more uncertain with economist Swati Dhingra set to replace rate-hike fan Michael Saunders in August.

#3: A lack of foreign exposure. Unlike most other FTSE 100 banks Lloyds has no foreign exposure to help reduce its dependence on Britain. This lack of strength through diversification makes it riskier and gives it fewer growth opportunities than its rivals.

For these reasons I’m happy to avoid Lloyds shares today.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Hargreaves Lansdown 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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