Lloyds Banking Group’s (LSE:LLOY) share price has jumped 12% since the beginning of the year. It’s a rise that reflects a broad uptick in investor confidence, as well as signs that the UK economy might not crash as was previously feared.
Yet despite this rise, Lloyds shares still look extremely cheap on paper. Today, the FTSE 100 bank trades on a forward price-to-earnings (P/E) ratio of 7.5 times. It also carries a meaty 5.4% dividend yield for 2023.
Does this make the company the best bargain on the FTSE index? And should I buy its shares for my portfolio?
Economic uncertainty
As I mentioned, better-than-expected signals on the health of the domestic economy has helped Lloyds’ share price to rise. The good news keeps on coming too, raising the prospect that full-year profits here might beat forecasts.
Yesterday, the British Chambers of Commerce (BCC) was the latest to deliver some cheery news. It said that the UK economy would likely contract just 0.3% in 2023. It would also avoid moving into technical recession, it added.
This suggests bad loans and revenues performance at Lloyds and its peers might not be as bad as feared. However, BCC’s update hardly merits cause for celebration for the bank’s investors. It also predicted that British GDP will remain below pre-Covid levels until late next year.
As we’ve seen, economists’ forecasts can often prove wide of the mark. But if BCC’s latest forecasts (alongside many others) are correct, Lloyds may struggle to grow earnings and therefore dividends.
Housing market trouble
Fresh evidence of weakness in the housing market should certainly concern the Black Horse Bank. As the country’s largest single lender with a near-20% market share, it relies on strong homes demand to drive profits.
Yesterday UK Finance announced there had been a sharp fall in mortgage applications during the last quarter. At the same time the Royal Institute of Chartered Surveyors revealed that the majority of homes are being sold below asking price. This stood at 60% for properties up to £500,000 and 70% for homes between £500,000 and £1m.
“A healthy mortgage market has historically been crucial to a healthy banking market,” says Krishnapriya Banerjee, a managing director at Accenture. Britain’s major lenders therefore may struggle in 2023.
The verdict
As a potential investor I’m also concerned about the profits outlook for Lloyds beyond the short term.
The UK economy faces a prolonged period of weakness on account of structural problems like low productivity and labour shortages. Furthermore, high street banks like this are having their market shares steadily chipped away by a rising number of challenger and digital banks.
I’m pleased that Lloyds is taking steps to remedy the latter threat. It continues to shutter branches to cut costs and therefore compete better with its new rivals on savings and loans rates. It is also investing heavily to improve its online proposition and this week invested £10m in digital ID business Yoti.
Still, it’s my opinion that the risks of buying the shares are too high despite their cheap price. I’d much rather buy other FTSE 100 value stocks today.
