This banking giant is one stock I love to watch. The Lloyds (LSE: LLOY) share price has rallied 20% since mid-February to sit at 49.70p at the time of writing. It’s a juggernaut of a company that boasts a £31bn market capitalisation.
Many investors are looking to snap up shares and invest in the UK banking giant. But I have three key reasons why I’m not ready to buy Lloyds shares in 2024.
Good value?
Lloyds is a large business within the financial services sector. Investors do like to buy recognisible names that have diversified and scaled business models. I just think there are other banks that might be better value.
Lloyds has announced a total dividend of 2.76p in the last 12 months. At the current share price, that gives the stock a 5.55% dividend yield.
That is above the FTSE 100 average of 3.7% but I think there are better options. For instance, HSBC is paying 7.5% for the dividend hunters among us.
Banks are often valued using a price-to-book (P/B) ratio. Lloyds has a P/B of 0.69, while Barclays trades at 0.39.
On these two metrics, it’s hard to rule in favour of Lloyds as a screaming buy. However, Lloyds does have a reputation as a defensive stock with a consistent dividend, which is worth keeping in mind.
Potential costs
Another reason I don’t fancy Lloyds right now is to do with some hefty provisions. The bank has set aside £450m to cover potential penalties heading its way. This comes as the Financial Conduct Authority (FCA) investigates claims of mis-selling within its car loans arm.
The big thing here is the actual costs are unknown. Some analysts are even estimating total costs of £1.5bn. This uncertainty, and the potential share price reaction to these findings, are another reason why I’m steering clear.
One big positive, though, would be if the penalties are contained and the uncertainty disappears.
Interest rates biting
Banks are intermediaries. They make their profits by earning more from assets (like mortgages and commercial loans) than they pay on their liabilities (like deposits and borrowings). This is what is called ‘net interest income’.
Central banks have been raising rates to reduce spending and fight inflation. This has been good for banks, boosting their income while not suffering badly on payments to depositors. For example, Lloyds’ underlying net interest income rose 5% year on year to £13.765bn in 2023.
However, the good times could be coming to an end. Inflation has reduced significantly since 2022. I think it’s a matter of when, not if, banks will cut rates.
When rates are high, I am happy to put some cash in the bank as it pays me a decent savings rate. When rates start to drop though, I want to withdraw that money to spend or invest it.
Usually this means banks compete to keep customers and this can erode that net interest margin. Of course, if Lloyds can protect its margins then that should provide a share price boost.
Nevetheless, this looming story of 2024 is the third reason why I’m not buying Lloyds shares right now.
The verdict
Lloyds looks to be a business with good fundamentals and a strong brand. Long-term investors may be frustrated with a lack of solid share price growth.
I don’t think it’s a bad business. If rates remain high and dividends continue then that would make me reconsider, I just think there are more exciting opportunities on my radar right now.
