The Lloyds Banking Group (LSE:LLOY) share price has taken a step backwards in February. But the bank is still 12% more expensive than it was at the beginning of 2023.
Like billionaire investor Warren Buffett, I’m a big fan of value stocks. And at around 52.7p per share, Lloyds shares continue to sell at a good price, at least on paper.
The FTSE 100 bank trades on a forward price-to-earnings (P/E) ratio of just 5.3 times. It also carries an index-beating 5.7% dividend yield right now.
4 big risks to Lloyds shares
Stronger-than-expected economic data from Britain has boosted Lloyds’ share price. It’s led to speculation that the UK-focused bank could deliver better profits than City analysts have predicted.
This is possible and might carry the share price sharply higher. But for me the risks of investing in the FTSE business remain too high right now. Here are four reasons why I’m avoiding the bank’s shares today.
Interest rate uncertainty
Higher interest rates have boosted bank profits over the past year. And further hikes are predicted in the coming months, widening the profits Lloyds makes on its lending activities.
But rates could fall very sharply later in 2023 as inflation normalises and the Bank of England attempts to stimulate the economy. Traders and economists have steadily downgraded their rate expectations in recent weeks and this is something investors should keep an eye on.
Increasing impairments
Credit impairments are soaring across Britain’s banks and Lloyds itself set aside £1.5bn in 2022 to cover bad loans. As consumers and businesses feel the pinch, impairment charges could continue to tick higher.
I’m especially worried about the huge debts that people are racking up during this cost-of-living crisis. Credit card borrowing in the UK hit its highest since 2004 late last year. Banking businesses could be sitting on a timebomb.
The weak housing market
Lloyds might be in particular danger given its position as Britain’s biggest mortgage provider. The Financial Conduct Authority has warned that 750,000 homeowners could default on their loans in the next two years.
On top of this, banks can expect the profits they make on their mortgage operations to fall as property prices fall. Zoopla says that 40% of properties listed on its website have had to reduce their asking price as buyer demand wanes.
Rising competition
Finally, established banks are having their market shares chipped away as consumers turn to challenger banks. Their impressive customer satisfaction scores and attractive products are causing huge disruption to Lloyds.
The problem could get worse too as the regulator considers loosening rules on new banks to improve competition. It said that taking action in areas like bank disclosure “removes barriers to entry.”
The verdict
When combined, I think all of these dangers make Lloyds shares a risk too far today. There are many cheap dividend stocks on the FTSE 100 with brighter trading outlooks that the Black Horse Bank. So I’d rather buy other value shares for my portfolio.
