Lloyds Banking Group’s (LSE: LLOY) share price has risen an impressive 10% so far in September. Demand for the bank’s shares is soaring as investors anticipate significant interest rate hikes in the months ahead.
Last week Lloyds was the most frequently-bought UK share on Hargreaves Lansdown’s investment platform. In fact the FTSE 100 stock accounted for a whopping 11.83% of all buy orders.
So should I also consider investing in the bank today? Or would I be better off buying other UK shares for my portfolio?
Great all-round value
It’s hard to argue that Lloyds’ share price looks quite appealing right now. As a value investor I’m drawn to its winning combination of low earnings multiples and large dividend yield.
City brokers think Lloyds will deliver earnings per share (or EPS) of 7.2p per share in 2022. With the bank trading around 47.8p this results in a forward price-to-earnings (P/E) ratio of 6.6 times.
To put this in context, other FTSE 100 banks NatWest and HSBC trade on multiples of 8.5 times and 8.1 times, respectively. And the broader Footsie average sits closer to 14-and-a-half times.
In terms of dividends, Lloyds shares currently command a 5% dividend yield. This beats the 3.9% FTSE 100 average by a decent margin.
Rate support
As I mentioned, market expectations for higher interest rates have boosted appetite for Lloyds shares. Banks make bigger profits in such a landscape as the difference they charge borrowers and offer savers widens.
This difference is known as the net interest margin. And higher interest rates in the first half of 2022 versus a year earlier pushed Lloyds’ margin to 2.77% from 2.5%. In turn, the bank’s net income jumped 12% year on year to £8.5bn.
Encouragingly for Lloyds, the Bank of England is predicted to keep aggressively hiking rates in this period of high inflation. A 0.5% rise is widely expected when policymakers meet next week. Though a 1% rise is being tipped by some in response to the slumping pound. Such a scenario could light a fire under Lloyds’ share price.
However…
Despite this support I don’t plan to buy Lloyds. And this isn’t just because the bank faces the threat of a profits-sapping recession in the coming months (Lloyds already put aside £377m to cover the possible cost of bad loans in the first half).
I’m happy to pass on the stock because of its poor long-term outlook.
Weak earnings have long been a problem for the bank. This in turn has caused its share price to lose 16% of its value over the past five years. And while higher interest rates are helping right now, the Bank of England is tipped to begin cutting them again in the second half of 2023.
The threat posed by challenger banks is also expected to intensify. And Lloyds’ focus on Britain creates additional danger given the prospect of long coronavirus-linked and Brexit-related economic hangovers.
All things considered, I’d rather ignore Lloyds and buy other cheap UK shares today.
