The Lloyds Banking Group (LSE:LLOY) share price has continued to sink in May. In fact, recent declines mean the FTSE 100 stock is now cheaper than it was at the start of 2023.
Lloyds shares are attracting fresh attention from bargain investors following this descent. During the last trading week the ‘Black Horse Bank’ was the second-most bought of all stocks on Hargreaves Lansdown’s trading platform.
On paper it’s not difficult to see why. At 45.81p per share, the company trades on a forward price-to-earnings (P/E) ratio of six times. It also carries a market-beating 6.1% dividend yield for this year.
Yet I still have huge reservations about adding Lloyds shares to my portfolio. Here are three reasons I’d rather buy other cheap FTSE shares right now.
Rates boost
High interest rates are critical for banks. They raise the margin between the interest they offer to savers and what they demand from borrowers.
Latest financials from Lloyds last week illustrate the impact rate increases can have on revenues. Total income at the bank soared 15% (to £4.7bn) in quarter one as the Bank of England continued hiking its benchmark.
Pleasingly for the FTSE firm, it looks like rate setters will remain committed to current policy, too. Inflation remains stubborn and expectations for the BoE to keep tightening policy remains intense.
Indeed, Goldman Sachs analysts now expect UK interest rates to hit 5% this year. That’s up from current levels of 4.25%. There’s a good chance that City forecasts will keep rising, too, as monthly inflation reports continue to surpass projections.
Credit woes
The bank also continues to stack up credit impairments (it stashed away another £243m in the first quarter to cover bad loans). And as interest rates rise and the economy struggles, the strain on individuals and businesses will keep growing.
Economic outlook
I’m also concerned about the murky long-term outlook for Britain’s economy and how this could impact Lloyds’ profits. Structural issues like low productivity, high private and public debt, trade restrictions and worker shortages all threaten GDP growth.
Unlike other UK banks such as Barclays, HSBC and Santander, Lloyds can’t look to foreign markets to help drive profits.
As if this wasn’t enough, the retail bank also faces fierce competition from new digital banks. It is losing market share as a consequence, while margins are coming under pressure as it tries to cling to its existing customers and win new business. It is is also having to invest heavily to digitalise its operations to better compete with the new kids on the block.
There are many top FTSE 100 stocks for me to purchase today. So I’m happy to pass on Lloyds shares and look for other cheap shares to add to my portfolio.
