The Lloyds Banking Group (LSE:LLOY) continues to struggle for traction as worries over interest rates and the struggling UK economy persist.
At 42.6p per share, the FTSE 100 bank is down 14% over the past 12 months. But I’ve had a fresh look at analyst forecasts in recent days. And they suggest now could be a good time to buy the battered bank.
Today, the banking giant has an average 12-month price target of 59.7p per share. That’s based on predictions from 19 analysts who’ve rated the stock.
If brokers’ price targets prove accurate, I could secure a 40% return on my cash by buying shares today. And that’s excluding the boost provided by any future dividend payments.
Interest rate boost
| Lloyds’ share price | 42.6p |
| 12-month price movement | -14% |
| Market-cap | £26.9bn |
| Forward price-to-earnings (P/E) ratio | 6 times |
| Forward dividend yield | 7.4% |
| Dividend cover | 2.2 times |
So what could propel Lloyds shares through the roof over the next year? In my opinion, the chief driver could be a sharp fall in interest rates should inflation crumble, as many economists expect.
On the one hand, Bank of England (BoE) rate cuts would harm profits by reducing banks’ net interest margins (NIMs). This key metric measures the difference between the interest that firms offer to savers and charge borrowers.
However, rate cuts could have a net positive on Lloyds’ bottom line by reducing the chances of more heavy loan impairments. It could also resuscitate demand for its loans, credit cards and other products as conditions improve for consumers and businesses.
Big risks
The trouble is that interest rates are by no means guaranteed to topple. In fact, the shock rise in core price inflation (CPI) in December means this scenario has become a little less likely. Conflict in the Middle East also raises the prospect of inflation remaining higher for longer.
As things stand roday, trading conditions continue to look quite bleak for the high street banks. The BoE’s latest Credit Conditions Survey, for instance, showed that lenders expect defaults by households with unsecured loans to hit their highest since 2009 this quarter.
Unfortunately for cyclical companies like banks, Britain’s economy is tipped to endure weak growth over the next few years. Some bodies like the Institute for Fiscal Studies are even predicting a recession in 2024. In this climate, revenues could dry up for the banks and impairments creep even higher.
Should I buy?
These stresses may cause Lloyds’ share price to lose even further ground over the next year. And they are by no means the only threats to the Black Horse Bank, either.
It faces a potential £1bn fine from the Financial Conduct Authority (FCA) for previous motor finance commission arrangements. It is also under close watch over accusations that high street banks have failed to offer fair savings rates.
Finally, the bank is facing a challenge to maintain its customer base as challenger and digital banks expand their product ranges. It’s fighting back by offering better products and investing in technology, but this is coming at enormous cost.
For these reasons, I’m not interested in buying Lloyds shares despite those bright price forecasts. I’d rather buy other cheap FTSE 100 stocks.
