The Lloyds Banking Group (LSE: LLOY) share price continues to rise strongly on Tuesday. Extended strength in recent days has now lifted the FTSE 100 bank to its most expensive since the middle of August.
Yet despite this mini rally Lloyds shares still look dirt cheap based on broker forecasts. City analysts think earnings will slip 3% in 2022. But this still leaves the business trading on a rock-bottom forward P/E ratio of 6.3 times.
What’s more, at 45.05p per share, Lloyds also carries a market-beating dividend yield. This sits at 5.3% for 2022, comfortably above the FTSE 100 average of 3.9%.
Is now a great time for me to buy Lloyds shares?
Rates to rise?
Lloyds’ share price has remained resilient despite the rapid slowdown in Britain’s economy in 2022. This could come as a surprise to some given the close correlation between broader economic conditions and bank profits.
But Lloyds and its peers have been rescued by the Bank of England adopting a more aggressive tone to curb inflation.
Policy makers lifted interest rates for the sixth successive time in August to current levels of 1.75%. Further action looks almost certain, too as the war in Ukraine continues and supply chains remain under pressure.
To recap, higher interest rates are good for banks. They widen the gap between what rates the likes of Lloyds offer to savers and to borrowers, allowing them to make higher profits.
Possible obstacles
That being said, I think there’s a huge danger that the Bank of England might not be as aggressive as the market expects in the months ahead. Such a scenario could pull Lloyds’ share price sharply lower again.
Not only might policy makers be reluctant to keep hiking rates if the UK economy moves into a painful recession. Rumours that new Prime Minister Liz Truss is to freeze energy prices might also discourage the Bank to continue aggressively tightening policy. In this scenario they might consider that inflationary pressure has peaked.
Other risks to Lloyds
Guessing exactly where interest rates are heading is tricky business in the current political and economic climate. But rates aren’t the only thing to consider when deciding to invest in Lloyds shares.
Even if energy prices are frozen, the UK economy still appears on course to enter a recession in the coming quarters. In this scenario Britain’s banks face a tsunami of bad loans (Lloyds itself put aside £377m in the first half to cover this possibility). They might also see revenues fall off a cliff.
And as a long-term investor I have serious worries over Lloyds’ profits outlook beyond the immediate future. The UK could be set for a long economic hangover as it suffers from the twin problems of Brexit and Covid-19. And Lloyds has no exposure to fast-growing developing or emerging markets to offset this threat to earnings.
Despite Lloyds’s cheap share price I won’t be buying the bank for my own portfolio.
