Lloyds Banking Group (LSE: LLOY) is a share that offers income and value investors plenty to get excited about. At least on paper, that is.
Predictions of more dividend growth in 2020 create a giant 6% yield. The bank trades on a rock-bottom P/E ratio of 8.3 times too. Sure, annual profits will fall 2% this year, but they’ll rebound in 2021. Or so say City brokers.
I’m not getting excited by Lloyds at current prices, though. And I don’t think that you should either. The FTSE 100 firm has seen revenues fall and bad loans tick higher as the UK economy has steadily cooled. And judging by recent lending activity, it looks like the banking sector is expecting things to get worse in 2020.
Bank of England data this week has shown that the country’s lenders are continuing to reduce corporate lending. A reading of -9.2 for the three months ending November 2019 was the third successive quarterly fall on the spin. It was also the worst reading since the depths of the 2008/09 financial crisis.
Threadneedle Street expects risk appetite from the likes of Lloyds to remain subdued for the foreseeable future too. It’s predicting that the credit supply to business will contract again in the three months to February 2020.
And it’d be a stretch to expect their lending appetite to recover following the passing of recent Brexit legislation. Under current law, either a trade accord with the European Union will be drawn up and signed off by the end of the year — an extremely-tough ask given the complexities of these processes — or the UK will accept an economically-disruptive no-deal exit.
I certainly wouldn’t expect Lloyds to turn the credit taps on from the second quarter, at which point there will be just 10 months left until that December 31 deadline. Regardless of its intentions though, it’s hardly a given that the demand will be there for the ‘black horse bank’ to start increasing lending again.
Demand is dipping
According to the BoE’s Credit Conditions survey, credit demand from business also fell during the fourth quarter of 2019. And in a further sign that individuals, like corporations, are becoming more risk-averse, Britain’s banks saw secured lending for the purposes of house purchase drop in the three-month period, as well as demand for unsecured lending like credit cards.
One final thing: the BoE expects credit demand for both home purchase and for remortgaging purposes to fall in the current quarter. As the country’s biggest mortgage provider (Statista says that Lloyds controls around 16% of the market, giving it the largest share of any single lender), this threatens to be a major problem.
So give Lloyds a miss, I say. There’s a galaxy of safer dividend stocks to buy on the Footsie today, some of which offer mightier dividends than the battered bank.
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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. 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.