There’s no doubting that Lloyds Banking Group’s (LSE: LLOY) share price offers great value for money, on paper. The FTSE 100 bank trades on a forward P/E ratio of 7 times. It also sports a mighty 5.3% dividend yield right now.
Still, there are major reasons why I’m not buying Lloyds shares right now. Some of these could weigh on the bank for years to come too, and include:
#1: A slumping econony
The main drag on Lloyds’ share price is the prospect of sinking revenues and ballooning loan impairments in 2022. The impact of soaring inflation on consumer spending and business activity is particularly acute for economically-sensitive companies like this.
It seems that conditions are likely to get worse before they get better too, as the war in Ukraine drags on and a resurgence of Covid-19 worsens existing supply chain problems.
#2: A deteriorating housing market
Lloyds is the UK’s single-largest mortgage provider with a market share of around 20%. News that the domestic housing market is beginning to cool should come as huge concern then.
The Bank of England said this week that mortgage approvals fell to 65,531 in April. That was the lowest reading since June 2020 and down almost 3,600 month-on-month. Lenders need to be prepared for further slippage as interest rates rise.
#3: Rising competition
Competition in the British banking sector presents a significant long-term risk to Lloyds’ share price. Newly-launched banks like Revolut and Monzo have taken a big bite out of the high street banks’ business. Established operators from overseas are also having huge success on these shores.
JP Morgan Chase, for example, has swept up 500,000 current account customers since launching here in September, it announced last week. These sorts of numbers could encourage other major foreign banks to have a run at the UK market.
#4: The cost of climate change
The threat posed by climate change to banks doesn’t command major column inches. But the costs associated with the warming planet for Lloyds could be colossal in the coming years.
The Bank of England (BoE) has said that banks and insurers face “a persistent and material drag on their profitability” if they fail to respond to climate change. It predicts that a failure to act could damage annual profits by around 10-15% on average.
Furthermore, the BoE says that “losses of this magnitude could make individual firms, and the financial system overall, more vulnerable to other future shocks”.
The verdict
Things aren’t all bad for Lloyds and its investors. Interest rates look set to keep rising, boosting the margin it makes on lending. Cost-cutting also continues to tick along nicely. And the business has one of the strongest brands out there, helped by extensive marketing spending in recent years.
However, it’s my opinion that the risks facing Lloyds and its share price more than outweigh these qualities. That’s why I’d much rather buy other UK shares today.
