At 42.3p the Lloyds (LSE:LLOY) share price has sunk 12% since New Year’s Day. It has now given up the gains it achieved during late 2023’s Santa Rally.
But with a forward price-to-earnings (P/E) ratio of 6.1 times the battered bank offers eye-catching value, at least on paper.
This isn’t all. With a 7.4% dividend yield for 2024, Lloyds shares also pack a punch for investors seeking passive income.
As someone who loves snapping up value stocks, is now the time for me to open a position?
Rate uncertainty
It’s no surprise to see the bank sink as worries over a tsunami of bad loans intensify. Lloyds racked up a staggering £2.4bn worth of bad loans between the start of 2022 and the third quarter of 2023. Full-year results on 22 February are tipped to show another big rise for the December quarter.
With the UK economy on the brink of recession, such pessimism over loan impairments is perhaps warranted. Yet on the other hand, should interest rates fall (as many commentators have tipped), the scope for more expensive charges could be limited.
The trouble is that the direction of future interest rates remains extremely hard to call. The Bank of England’s benchmark was held at 5.25% this week. But the Monetary Policy Committee was split three ways between hiking, holding, and lowering rates. This was the first time that happened since 2008.
Furthermore, while Bank governor Andrew Bailey said that inflation is “moving in the right direction,” upward price pressures could flare up again as new Brexit trade rules come into effect and tensions in the Middle East intensify, meaning rates may remain higher for longer.
Trouble ahead
I’m someone who invests for the long term, say, a decade or more. So I may be tempted to buy a stock even if it faces a degree of near-term upheaval. And especially if it carries a low valuation as Lloyds shares do today.
The problem I have is that the UK economy faces a prolonged period of weak growth. This has the potential to keep Lloyds’ revenues on the back foot and mean that impairments stay at elevated levels, even if interest rates begin to fall.
The International Monetary Fund predicts Britain to be in the top-three-worst growing economies through to 2025. And the UK faces major challenges to break out of this rut like huge public debts, labour and skills shortages, regional discrepancies and low productivity.
The verdict
As if this wasn’t trouble enough, Lloyds — along with the UK’s other high street banks — face a growing threat from digital rivals. What’s more, the challenge could get even steeper if big tech companies throw their weight behind the new kids on the block (in recent weeks, rumours have grown that Google owner Alphabet could invest £500m in Monzo).
Lower overheads mean these disruptors can offer market-leading products. And they’re expanding rapidly into new areas, driving their tanks even further onto their established rivals’ lawns.
On the plus side, Lloyds has tremendous brand power that dates back centuries. This could help it to bat back the threat from the digital and challenger banks and remain a big market player.
But this isn’t a gamble I’m prepared to take with my own money. All things considered, I think the risks of buying Lloyds shares are far too high for me.
