Is Lloyds Banking Group (LSE: LLOY), a no-brainer buy, or something to be avoided? Today, I’m looking at few things I think could make Lloyds shares a buy for 2023. And a few that might suggest otherwise.
I’ll start with the share price. It’s down. Lloyds shares are actually about even over the past 12 months. But in the past five years, we’ve seen a 30% decline. A depressed price might make Lloyds shares a buy.
But it might not. We’re in a recession, and we have no idea how long it will last. When the economy is in the dumps, the banking sector is almost certain to face a tough time. Finances are at the heart of everything. And when a bank’s customers are feeling the pinch, they won’t want to borrow and spend as much.
Lending
But then, interest rates are high now. That means banks like Lloyds can earn bigger profit margins from their lending. It’s a balance between the volume of loans, and the percentage profit made from them.
Lloyds is the UK’s biggest mortgage lender, and mortgages are more profitable for banks now. Unless a critical number of borrowers default, that could be good news.
Property
Against that, the property market is starting to suffer. According to Nationwide, house prices fell 1.4% between October and November, the first dip for two years. That’s likely to dampen folks’ enthusiasm for big mortgages and new houses.
The again, year-on-year prices are still rising, albeit at a slower pace. UK homes are 4.4% more expensive than a year ago. And the UK is still facing a chronic housing shortage, which seems unlikely to end any time soon.
Dividend
The dividend could make Lloyds shares attractive too. We’re currently looking at a 4.6% dividend yield for 2022. And City analysts currently predict rises for the next two years. By 2024, we could be looking at more than 6%.
But forecasters are often the last people to catch on to changing circumstances. And they’ll frequently maintain their bullishness for a lot longer than seems sensible to most people.
Valuation
Still, Lloyds shares are on a very low fundamental valuation now, at least in price-to-earnings (P/E) terms. The forward P/E is under seven, and looks set to drop to around 6.2 by 2024. That’s less than half the long-term FTSE 100 average.
Do bank stocks warrant a lower valuation in tough economic times? I’d say so, yes. But do they deserve to be quite that low? I think not.
Verdict?
So what does a poor investor do about these factors tugging Lloyds sentiment in different directions? For me, the answer is to ignore what’s happening right now, forget this year and the next two years, and look to the long term.
If the UK economy has a good long-term future, then I can’t see how the banks won’t make good money in the coming decades. And if I buy shares, I’d expect good dividends well into the future. Nothing is literally a no-brainer, but I reckon long-term banking comes close.
