The Lloyds Banking Group (LSE:LLOY) share price has gained fresh momentum in recent sessions. It has risen 7.3% in just three weeks as dip buyers have capitalised on recent weakness at the FTSE 100 bank.
At current prices, Lloyds shares still look like a steal, however. At 45.8p per share, the company trades on a forward price-to-earnings (P/E) ratio of six times. This is well below the FTSE Index average of 14 times.
The Black Horse bank also offers a large 6.1% dividend yield at current prices. This sails above the corresponding 3.8% average for UK blue-chip shares.
So is the company a top buy for value investors?
Bad loan blues
It’s my opinion that Lloyds shares should be avoided despite their low cost. I believe their cheapness is a fair reflection of the huge risks they pose to investors.
One major concern to me is a possible sharp rise in loan impairments as companies and individuals struggle to make ends meet. Bank of England rate rises are boosting the profits banks make on their lending activities. But they also threaten to turbocharge the quantity of bad loans on their books.
For example, data today showed the number of corporate insolvencies jumped 27% in June. It also revealed quarterly insolvencies rose above 6,000 from April to June, the first time they’d breached this level since the financial crisis.
Nicholas Hyett, investment manager at Wealth Club, commented that “the only other time things have looked this bleak was during the early 90s recession”. High inflation means that interest rates are likely to keep rising, too. So the business failures could keep coming thick and fast.
Retail banks also face a steady rise in the level of bad loans among individuals. The pressure on mortgage holders is especially intense right now as the Bank of England hikes rates.
This is a problem for Lloyds given its large home loans book. Total mortgage balances here stood at £309.5bn at the end of 2022. This gave the bank a huge 19% share of the overall market.
FCA talks tough
Rising impairments aren’t the only worry for the banks, either. The Financial Conduct Authority (FCA) is threatening to get tough amid accusations that banks are failing to hike savings rates as far as they should be.
FCA chief executive Nikhil Rathi told MPs today that “enforcement action” could happen under new regulations later this month. Rules that narrow the difference between the interest rates that banks charge borrowers and offer savers could, in the current environment, leave Lloyds struggling to grow profits at all.
A bleak outlook for the UK economy beyond 2023 suggests the bank may deliver disappointing earnings over the longer term, too.
There are plenty of FTSE 100 shares that trade on low P/E multiple and offer huge dividend yields following recent market volatility. So I’m happy to ignore ‘cheap’ Lloyds shares and buy other UK shares with my hard-earned cash.
