Lloyds (LSE: LLOY) shares remain among the most popular with investors using Hargreaves Lansdown’s investment platform
The ‘Black Horse Bank’ accounted for 1.72% of all buy orders via the FTSE 100 investment firm last week. This made it the third most popular stock with Hargreaves Lansdown investors.
Should I buy Lloyds shares for my own portfolio? Or should I use my money to invest in other UK shares?
Great value!
As a bargain investor I’m hugely attracted by the bank’s terrific all-round value. Lloyds’ share price has dropped 16% in 2022, leaving it trading on rock-bottom earnings multiples and market-beating dividend yields.
At 41.5p per share, the stock trades on a forward price-to-earnings (P/E) ratio of 5.7 times. It also boasts a mighty 5.9% dividend yield for 2022, beating the 4.2% FTSE 100 average comfortably.
Three big threats to Lloyds shares
Shares with low valuations like this are often packed with risk. Lloyds is no different in this respect.
As a potential investor there are three specific issues that worry me. These are:
1. A meltdown in the mortgages division
Lloyds faces a toxic combination of slumping revenues and soaring loan impairments across the business. But I’m particularly worried about what a meltdown in the housing market could do to its bottom line.
Mortgages account for two-thirds of all of the bank’s loans and advances.
Demand for Lloyds’ mortgages is at risk of sinking as the Bank of England hikes rates. The business also faces an avalanche of bad loans as the cost-of-living crisis worsens.
Santander has witnessed a ‘slight’ uptick in the number of Brits missing mortgage payments, it recently said. I think numbers might soar across the banks in the months ahead as fixed-rate deals come to an end.
2. Intense competition
Lloyds’ profits aren’t just endangered by the economic landscape. Rising competition among Britain’s banks also poses a considerable threat.
Built over 257 years, Lloyds has one of the most trusted brands in the banking industry. But it is coming under extreme stress as the number of digital-led challenger banks increases.
The FTSE 100 bank is spending vast amounts on its digital operations to keep up. It is also taking a hit to margins as it tries to match the attractive products on offer from its rivals.
3. Lack of foreign exposure
Over the longer term I’m concerned about how Lloyds’ narrow geographical footprint will hamper earnings growth.
HSBC and Standard Chartered are focussing increasingly on fast-growing Asian markets. The latter also has a considerable presence in Africa. Meanwhile Santander operates across Latin America.
Lloyds’ operations are focussed on the mature British retail market. This is a low-growth territory that faces significant obstacles as the firesale of UK assets in recent weeks illustrates.
The verdict
On the plus side, Lloyds will receive a boost as the Bank of England continues raising rates. Worse-than-expected inflation means that rates might stay higher for longer, too.
However, I believe that the range of other threats facing Lloyds makes it far too risky to invest in. So I don’t care if it looks cheap on paper. There are plenty of other value stocks I’d rather buy today.
