December 2023 was a happy time for the Lloyds Banking Group (LSE:LLOY) share price. After trading lower for most of the year, the FTSE 100 bank shot higher last month as worries over the UK economy — and the knock-on effect this could have on high street banks — sharply receded.
This meant Lloyds shares rose 3.8% in value in 2023 as a result. Yet despite December’s Santa Rally the company still offers excellent all-round value.
The bank’s price-to-earnings (P/E) ratio sits at just 6.6 times for 2024. This is well below the FTSE index’s forward average of 11 times. Meanwhile, its dividend yield of 6.6% smashes the 3.8% average for other Footsie shares.
So is now a good time to buy the firm for my Stocks and Shares ISA? My answer to this simple question is an emphatic ‘no’. Not only do I think Lloyds’ share price could continue to crumble in the new year, I think it could remain locked in its long-term downtrend.
Here are just three reasons why I’m avoiding the Black Horse Bank right now.
1. Falling NIMs
Hopes of interest rate cuts by the Bank of England (BoE) have helped cyclical shares like this rise recently. In the case of banking stocks, lower rates could help these businesses avoid more thumping loan impairments.
The trouble is that rate reductions will also adversely affect their net interest margins (NIMs). These are key profitability metrics that measure the difference between the interest banks pay savers and what they charge borrowers.
With interest rates now expected to fall as soon as the spring, Lloyds could find it hard to generate any sort of earnings growth when you also consider point number two.
2. Tough economic conditions
The UK economy is broadly tipped to perform weakly next year, regardless of interest rate movements. So Lloyds — which has already set aside £2.4bn since the start of 2022 to cover bad loans — might continue to rack up painful impairments.
The BoE has in fact sliced down its growth forecasts for 2024. It now expects Britain’s economy to flatline this year. If this gloomy omen proves correct, the country’s banks are also likely to witness poor demand for their financial products.
I’m concerned that Britain’s economy could remain weak for some time too. Structural issues like low productivity, labour shortages, and trade frictions also pose a rising long-term threat to economic growth.
3. Mounting competition
Something Lloyds has in its favour is its exceptional brand recognition. Having a brand that consumers feel they can trust is an especially potent weapon in an industry where you look after people’s money.
But despite this advantage, the bank still has a bloody fight on its hands to retain customers. The financial services industry is becoming increasingly fragmented and challenger and digital banks are growing their customer bases rapidly, thanks to their dynamic online models and market-leading products.
Worryingly for Lloyds, competition is especially fierce in the mortgage sector, a key profits driver for the firm. Banks and building societies are aggressively slashing rates right now, and Lloyds now finds itself way a long way down the ‘best buy’ tables. This could become the norm across its product classes.
