Lloyds‘ (LSE:LLOY) share price performance has been nothing short of brilliant during the last year. The economic outlook for its core UK market remains gloomy, yet the FTSE 100 bank has risen an impressive 33% in value.
Can it continue rising though? If broker estimates are accurate, Lloyds’ shares will increase another 28% over the next 12 months. That’s based on the average of 18 different price forecasts today.
Not many expected the Black Horse Bank to take off as it has, myself included. But I feel its share price could be on the cusp of a sharp correction. And I’ve found 16,976 more reasons to be cautious right now.
Customer exodus
Lloyds is one of the most trusted names in UK banking. In a mature industry with limited growth potential, this is worth its weight in gold. It allows the business to generate significant profits and pay healthy dividends to its shareholders.
The problem is sector competition is fierce, putting established names like this under growing pressure. And the strain to keep customers and attract new ones is mounting, as building societies and challenger banks expand and improve their product ranges. This, in turn, poses a significant threat to Lloyds’ profits (and, by extension, share price).
Q1 data from the Current Account Switch Service (CASS) underlines the scale of the challenge. On the plus side, the number of people switching to Lloyds accounts outweighed those moving away by 12,073.
The problem is migration from the bank‘s subsidiaries more than offset these gains. Net outflows for Halifax and Bank of Scotland in Q1 were 25,629 and 3,420 respectively. The result? The broader Lloyds Banking Group lost a net 16,976 current account holders in the quarter.
Mounting dangers
These falling numbers create a variety of problems for banks. Cross-selling opportunities decline, and operators can be forced to seek other more expensive forms of funding (like issuing bonds). In response, they may have to offer switching incentives and better rates to attract customers, eroding margins.
The thing is, tough competition’s nothing new in the banking sector. And yet Lloyds remains one of the UK’s biggest players, with around 28m customers. So would this threat alone discourage me from buying its shares? Probably not.
However, competitive risks aren’t the only obstacle to Lloyds’ profits, both in the near term and beyond. Other major potential dangers include:
- Rising credit impairments as the UK economy cools.
- Weak loan demand from consumers and businesses.
- A housing market crash as interest rates rise.
- Soaring car finance misconduct costs.
- Falling interest rates further out that reduce net interest margins (NIMs).
Time to avoid Lloyds shares?
To be clear, Lloyds remains a solid, well-functioning bank. It has a good record of earnings growth — even in difficult times — and a robust balance sheet to invest in areas like products and its digital platform. Its strong CET1 capital ratio of 13.4% also bodes well for shareholders seeking more juicy dividends.
But in my view, the risks of holding Lloyds’ shares today far outweigh the potential benefits they might deliver. The bank might be worth consideration for less risk-averse investors. I’ll be buying other FTSE 100 shares for my portfolio though.
