Don’t buy Lloyds Banking Group plc until you’ve read this

There’s no doubt thatLloyds Banking Group (LSE: LLOY) is one of the most popular stocks for private investors in the UK. In fact, at broker Hargreaves Lansdown, Lloyds Bank was both the most purchased and the most sold stock last week.

Adopting the mindset of the average investor, it’s easy to see why Lloyds shares have appeal. The stock has been beaten down from above 500p to just over 50p over the last decade and trading on a low P/E ratio of 7.8 times FY2016’s forecast earnings, Lloyds certainly appears to be cheap. Furthermore, with the bank paying out dividends of 2.75p last year, a yield of 5%, Lloyds looks to be a cash cow from a dividend perspective.

However if you’ve been thinking about buying shares in Lloyds Banking Group in the near future, make sure you read this first.

Goldman Sachs’ downgrade

Just last week, investment bank Goldman Sachs cut its stance on Lloyds Banking Group from neutral to sell and trimmed its price target by 6% to 50p, noting that the bank faces challenges from low interest rates as well as increasing competition.

Goldman stated that the “twin challenges” of low interest rates and intensifying competition is likely to have a “significant impact” on profitability at Lloyds, and slashed its earnings forecasts for FY2016 to FY2018.

One reason Goldman thinks the trading environment is about to get tougher for Lloyds is that it believes rival HSBC is about to go on the offensive, deploying “significant excess deposits” into the UK mortgage market, taking market share from Lloyds.

Furthermore, Goldman believes that the recently introduced Term Funding Scheme, in which the Bank of England will lend up to £100bn to banks at a minimal interest rate, will benefit the challenger banks such as Virgin Money and Aldermore, allowing these smaller banks to pass on the lower rates to customers, and thus resulting in further competition for Lloyds. Ultimately, Goldman believes Lloyds will be forced to cut its prices and that this will reduce the bank’s profits.

So is now the time to sell?

Goldman Sachs may be a well respected financial institution, but investors should never blindly follow a broker’s recommendation without doing their own research. And while Goldman may have planted a sell recommendation on Lloyds, it should be noted that there are plenty of other brokers with a positive stance towards the bank.

Having said that, I believe Goldman does make some valid points and it’s worth keeping these issues in mind if you’vve been thinking about purchasing Lloyds shares. There’s every chance the next few years could be challenging for the business, with increasing competition from HSBC and the challenger banks, combined with ramifications from the UK’s decision to leave the EU. The outlook for earnings and dividends at Lloyds definitely looks more uncertain than it did six months ago.

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Edward Sheldon owns shares in Aldermore Group. The Motley Fool UK has recommended HSBC Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.