The Lloyds Banking Group (LSE: LLOY) share price has fallen 4% during the last 12 months.
A grim outlook for the UK economy has pulled the FTSE 100 bank lower. But its shares have been supported by a steady rise in British interest rates.
Could Lloyds shares be set for a spectacular recovery in 2023? And should I buy the beaten-down bank for my portfolio?
A grim 2023
Firms involved in financial services are highly sensitive to broader economic conditions. This is why Lloyds is busily stashing money away to cover potential bad loans.
It set aside a higher-than-expected £1.05bn between January and September alone. This caused pre-tax profits to slump by £765m year on year in the period, to £5.2bn.
As thing stand, I’m expecting loan impairments to keep climbing, too. The Bank of England expects Britain’s economy to steadily contract until mid-2024 as the cost-of-living crisis continues and tax rises come into effect. This is also likely to put extreme stress on the banks’ revenue performances.
Should I invest?
I’m not convinced, then, that Lloyds’ share price will roar back into life in 2023. But this doesn’t necessarily mean I wouldn’t buy the company for my Stocks and Shares ISA.
This is because I purchase shares with a long-term view in mind. In other words, if I think a stock will deliver decent returns over the following decade I’ll snap it up.
I like retail banking banks like Lloyds during normal times. Almost all of us need a bank account, a mortgage, or a credit card at some point. So such companies can be relied upon to deliver decent profits and to consequently pay out big dividends.
Risky business
But businesses like this face a period of weak earnings growth beyond the near term. This is because pandemic- and Brexit-related hangovers are likely to constrain UK economic growth for years to come.
At the same time, interest rates will likely have to remain low to help stimulate a weak domestic economy. This will dampen the profits banks can make on their lending activities.
Lloyds is also at risk from increasing competition from challenger banks. Some 43 more of these were launched globally in 2022, with numbers continuing to grow strongly in Britain thanks to regulatory changes.
An investor trap?
Stock market volatility means a lot of FTSE 100 shares carry ultra-cheap valuations today. This gives extra scope for impressive share price gains over the long term.
Lloyds shares are certainly popular with UK value investors today. For 2023 the Black Horse Bank trades on a forward price-to-earnings (P/E) ratio of just 6.4 times.
It also offers market-beating dividend yields. At 5.4% the bank comfortably beats the FTSE 100 index average of 3.8%.
But I’m not tempted to buy Lloyds shares today. I think its cheap share price reflects the prospects of prolonged weak profits growth amid rising competition and worsening economic conditions. For this reason I’d rather buy other UK shares for next year.
