The Lloyds share price is sinking again! 3 problems new investors need to consider

Is Lloyds packed with too much risk right now? Royston Wild discusses the issues that new investors need to consider before taking the plunge.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

There aren’t many stocks on the FTSE 100 that I’m quite as indifferent to as the banks. Let’s use the Lloyds (LSE: LLOY) share price as an indication. It’s taken an almighty beating since the Covid-19 crisis emerged on these shores and battered the UK economic outlook. As I type, it’s falling again, back towards April’s eight-year closing lows.

Don’t be fooled into thinking Lloyds Banking Group will rebound as Britain gradually recovers from the coronavirus catastrophe however. In truth, the business has a variety of serious — and long-established — problems that threaten to overshadow it for years. It’s why the Lloyds share price was sinking long before the pandemic even emerged, down almost 20% in the five years to the beginning of 2020.

Therefore, there’s clearly plenty that potential buyers need to consider before taking the plunge with Lloyds.

Lloyds’ rate pain

The problem of low interest rates has been an obstacle for the entire UK banking sector for more than a decade. The continuation of ultra-loose monetary policy from the Bank of England has meant the Lloyds share price, along with those of its blue-chip peers, has underperformed the broader FTSE 100 ever since the 2008/2009 financial meltdown.

It’s an issue that’s likely to get worse before it gets better, with Bank of England chief Andrew Bailey touting the possibility of negative interest rates before too long.

Penalties piling up

Fears over future monetary policy dominate investor thinking around Lloyds. So do concerns over how far Covid-19 and Brexit will damage the bank’s bottom line. But one extra thing that puts me off Britain’s banks is the steady drip-drip of financial penalties related to previous misconducts.

Last week, Lloyds was fined £64m by the FCA for unfair treatment of some of its mortgage customers. It follows a £46m penalty doled out in the autumn for its failure to disclose fraud at a branch in Reading more than a decade ago.

New claims for the mis-selling of PPI — a scandal which has so far cost the bank somewhere in the region of £22bn — is no longer something it has to worry about. But the steady stream of financial penalties related to other previous wrongdoings continues to chip away at profits. Who knows what will pop up next.

Stack of new bank notes

Bags of debt

All of the aforementioned issues would be bad at the best of times. But the state of Lloyds’s balance sheet adds another layer of worry for its investors right now. The bank already carries eye-watering amounts of leverage, and while it continues to scrape past Bank of England stress tests, it’s in danger of falling flat on its face before long.

Remember the Lloyds share price isn’t actually that cheap. At 30p per share, it sports a price-to-earnings (P/E) ratio of around 20 times. This soars above an average of 6-7 times which it was trading on before the Covid-19 crisis.

And remember, Lloyds no longer boasts the show-stopping 6% yields to offset its higher earnings multiple, following its decision to axe dividends in line with FCA guidance.

In my opinion, the bank offers plenty of risk and little else at current prices. I’d much rather invest in other cheaper FTSE 100 shares right now.

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 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.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »