The Lloyds Banking Group (LSE: LLOY) share price slumped in September as the firesale of UK assets heated up. Worries over the impact of late September’s ‘mini budget’ prompted frantic selling of the smallest UK share to the largest FTSE 100 stock.
Yet Lloyds shares have rebounded sharply from recent 10-week closing lows. The ‘Black Horse Bank’ is now 5% higher, at 43p per share.
Is now the time to buy the company for my stocks portfolio?
6.2% dividend yield
Despite Lloyds’ share price improvement, the bank still looks terrifically cheap on paper. First it trades on a forward price-to-earnings (P/E) ratio of just six times.
This is well below the FTSE 100 average of around 14 times. It’s also fractionally lower than the readings of other blue-chip banks like HSBC, Standard Chartered, and NatWest.
Second, Lloyds carries a mighty 5.6% dividend yield for 2022, one that beats the 4.1% Footsie average. And the yield marches to 6.2% for next year.
Bank profits in jeopardy
It’s my opinion, though, that those rock-bottom earnings multiples are reflective of its uncertain profits outlook. In fact not even those huge dividend yields are enough to encourage me to invest.
City analysts have been downgrading their earnings forecasts for Lloyds in recent months. They now expect bottom-line reversals of 4% and 3% in 2022 and 2023.
I fear that these medium-term forecasts could be slashed further as the UK economy veers towards recession. Lloyds has already put away £377m to cover the possible cost of bad loans. Evidence is mounting that it may have to endure further charges as people and companies feel the squeeze.
Latest government statistics showed 1,933 company insolvencies in England and Wales in August. That was up a whopping 43% year on year.
House of pain
Lloyds also faces a big hit due to its reliance on a strong housing market.
The bank is the largest provider of home loans in the UK. It currently has a market share of around 18%, leaving it vulnerable to an avalanche of loan impairments as people’s fixed terms come to an end and they move onto more expensive deals.
Current consensus suggests that the Bank of England will raise rates to around 5.5% next year. This is more than double current levels and will filter through to a big hike in mortgage costs for millions of homeowners.
What I’d do today
Higher interest rates are good for the banks in usual times. They bloat the margins between what they provide loans at and what they offer on savings accounts.
However, in periods of economic stress, the benefits they bring are far reduced. The likes of Lloyds can’t make the most of these higher rates if demand for their financial products sink. And the drag of higher bad loans due to rate increases on profits can also far outweigh the benefits to margins.
I’m attracted by Lloyds’ gigantic dividend yields. But there are plenty of big-yielding FTSE 100 shares for me to invest in today. So right now I’d rather use my money to buy other cheap income shares.
