As one of the largest banks in the UK, Lloyds (LSE:LLOY) shares are among the most popular on the London Stock Exchange. And yet, its performance doesn’t seem to live up to its reputation, with shares systematically underperforming the FTSE 100 for nearly two decades.
That picture may be changing. Looking at the latest results, rising interest rates have enabled profits to surge. This ultimately enabled management to both hike dividends and trigger a £2bn share buyback programme.
Needless to say, these are encouraging signs. So it’s no surprise that Lloyds is back in the top five most-bought stocks on Hargreaves Lansdown’s trading platform.
However, despite this progress, some troubling signs are brewing, suggesting that now might be a good time to jump ship.
1. Deposits are shrinking
There are a lot of positive factors in Lloyds’ latest interim results. However, the state of deposits may be an early indicator that the gravy train might soon come to a halt. Total customer deposits shrunk by £5.5bn in the first six months of the year. And compared to June 2022, they’re actually down £8.4bn.
The bank is by no means short on funds. It still has around £470bn of deposits on its books. However, seeing the transfer of wealth steadily accelerate indicates that depositors are moving their money. And looking at the rates offered by Lloyds today versus its competitors, the group certainly seems to be behind the curve.
Should the withdrawals continue escalating, management may be forced to offer higher rates on its savings accounts. And, consequently, the recent jumps in profit margins may be reversed.
2. Defaults are rising
Another factor that’s starting to look concerning is the level of impairment charges. Not every household is managing to keep up with mortgage payments. And the pressure from rising interest rates seems to be taking their toll.
Lloyds has already had to write off hundreds of millions of pounds worth of loans as default rates start to climb. And this trend is likely set to continue getting worse as the Bank of England continues to hike rates in the fight against inflation.
Again, with a loan book in the hundreds of billions, I highly doubt the bank will end up in any significant state of financial distress. But it’s another factor that can place notable pressure on already tight profit margins.
3. The economy’s still wobbling
In the long run, the British economy will most likely bounce back from its current weakened state. Forecasts already indicate that a recession will be narrowly avoided, and growth will start to ramp back up next year. However, based on current consensus, the level of predicted GDP growth leaves much to be desired.
With Lloyds shares strongly correlated with the British economy, lacklustre growth in one likely means the same for the other. And while higher dividends might help make up for mediocre share price growth, shrinking deposits and rising defaults may make that harder to achieve.
All things considered, I don’t see Lloyds as a terrific investment today. There are seemingly plenty of other businesses in a far superior position to thrive, in my opinion. Therefore, if I were a Lloyds shareholder and needed capital to take advantage of a new opportunity, I might consider selling some Lloyds shares to do so.
