Are Lloyds shares an excellent buy after 2023’s record profits?

Lloyds shares are on the ropes despite news of better-than-forecast earnings for 2023. Is the FTSE bank now too cheap for me to ignore?

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Market confidence for Lloyds Banking Group (LSE:LLOY) shares is weakening in Thursday morning business. That’s even after the bank announced blockbuster earnings for last year. At 42.6p per share, the FTSE 100 stock was last trading 1.7% lower on the day at the time of writing.

A steady flow of interest rate rises drove Lloyds’ net interest margin (NIM) to 3.11% in 2023, up 17 basis points year on year. This critical metric — which measures the difference between the interest banks charge borrowers and offers savers — pushed net income 3% higher, to £17.9bn.

As a result, Lloyds’ pre-tax profits soared 57% higher last year, to all-time peaks of £7.5bn. This was also ahead of broker forecasts.

So why have investors failed to react positively? And should I now buy Lloyds shares for my portfolio?

Motor loans mayhem

The negative market reaction partly reflects fears of heavy charges in 2024 and beyond. More specifically, investors have been spooked by a £450m charge Lloyds has booked to cover a regulatory probe into car finance practices.

Lloyds says that the charge “includes estimates for costs and potential redress.” However, it adds that “there remains significant uncertainty as to the extent of any misconduct and customer loss, if any, the nature of any remediation action, if required, and its timing”.

Analysts at RBC Capital Markets suggest the total industry bill could come in at a stunning £16bn. And worryingly, Lloyds has relatively high exposure to the motor loans market.

Tough outlook

The car loans probe adds extra uncertainty to a stock that’s already at the mercy of tough economic conditions.

Last year Lloyds booked £308m worth of bad loans, down significantly from the £1.5bn booked a year earlier. But with Britain facing a prolonged economic downturn, credit impairments could remain uncomfortably high.

High-street banks like this may also strain to grow revenues if economic conditions sap loan demand. Bank of England rate hikes helped Lloyds grow the top line last year. But with the rate hiking cycle seemingly at an end — in fact, rates are now tipped to begin falling from late spring — there is no obvious driver for the bank’s sales and profits columns.

Cheap but risky

I like Lloyds because of its strong balance sheet and commitment to returning excess cash to investors. For 2023, the bank raised the total dividend 15% to 2.76p per share. It also today announced a new share buyback programme of £2bn.

This was underpinned by the bank’s solid CET1 capital ratio of 14.6%.

But on balance, I believe the risks of buying this Footsie stock remain too great. Lloyds’ share price has fallen around 20% in the past year due to fears over the British economy and falling NIMs. Concerns over gigantic car-finance-related charges add another layer of danger to the business.

So I’m unmoved by the firm’s low price-to-earnings (P/E) ratio of 6.4 times and 7.4% dividend yield. I’d rather buy other low-cost UK shares for my FTSE 100 portfolio.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Hargreaves Lansdown Plc and Lloyds Banking Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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