Britain’s listed high street banks have got 2024 off to a truly miserable start. Lloyds Banking Group (LSE:LLOY), for instance, has endured a 13% share price decline since New Year’s Eve.
The FTSE 100 bank has now lost almost all the gains it printed at the back end of last year. Hopes of profits-boosting interest rate cuts over the spring have given way. The market now fears a prolonged period of weak loan growth and high impairments.
However, I’m looking again at Lloyds shares and considering whether now could be a good time to open a position. This is because I buy shares based on what returns I can expect over the long-term (ie a decade or more). If the case is compelling enough on this basis, I’m happy to accept some temporary pain.
A popular stock
Lloyds’ recent share price decline is certainly attracting the attention of many other bargain hunters. The Footsie bank was the third most-purchased share among Hargreaves Lansdown investors in the seven days to 15 February.
It was also the sixth most popular buy with people using AJ Bell‘s trading platform.
At first glance it’s easy to see why. At 41.5p per share, the Black Horse Bank currently trades on a forward price-to-earnings (P/E) ratio of 6 times, way below the Footsie average of 11 times.
Meanwhile, the company’s dividend yield for 2024 sits at 7.7%. This soars above an average of 3.9% for FTSE 100 shares.
Risk vs reward
Some stocks command rock-bottom valuations for a reason however. And in the case of Lloyds shares, I think the risks of ownership may outweigh the potential benefits.
As I say, I’m someone who purchases shares for the long haul. But it’s difficult to ignore the upheaval that UK-focused banks like this face in the short-to-medium term.
The British economy is locked in a period of low-to-no growth at the moment. In fact, it’s now in recession territory after official data showed GDP reverse by a worse-than-forecast 0.3% in the final quarter of 2023.
In this scenario it’s tough to see how the likes of Lloyds can grow earnings. And especially as digital and challenger banks continue to expand their product ranges to poach the big banks’ customers.
At the same time there’s no certainty that interest rates will be reduced to help the ailing economy. Monetary Policy Committee member Megan Green has just warned monetary policy may remain “restrictive for some time” even if inflation falls to the Bank of England’s 2% target.
This would put further stress on people trying to repay their loans and deal a hammerblow to credit demand.
Here’s what I’m doing
Unfortunately, there’s no obvious catalyst in sight for the British economy either. Falling productivity, worker shortages, high public debts and regional disparities are just a few major obstacles to growth.
As a consequence, the likes of Lloyds may struggle to deliver meaningful capital gains over the long term.
On the plus side, the bank’s strong balance sheet means it may continue to pay market-beating dividends for the next few years, at least. But the possibility of some more large payouts isn’t enough to tempt me to invest.
All things considered, I think there are much better FTSE 100 value stocks for me to buy right now.
