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Should I buy Lloyds shares in August?

A brochure showing some of Lloyds Banking Group's major brands
Image: Lloyds Banking Group

Could now be a great time to buy Lloyds Banking Group (LSE: LLOY)? Well ,the strong economic recovery has pushed the FTSE 100 bank’s share price 67% higher over the past 12 months. Economists continue steadily upgrading their UK growth forecasts too, raising the chances that Lloyds’ share price could continue soaring.

More growth upgrades!

Bullish economic predictions from the National Institute of Economic and Social Research (NIESR) has helped the LLOY share price rise again on Tuesday. The body hiked its 2021 GDP growth forecasts for the UK to 6.8%. This is up a sizeable 1.1% from estimates made just three months ago.

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On top of this, the forecaster says that the CPI gauge of inflation will rise to 3.5% in the final quarter of this year. It will then peak at 3.9% in Q1 2022 before eventually settling around 2% in 2023.

This has raised some suspicion that the Bank of England could be forced to hike interest rates to bring inflation back inside its 2% target. Low base rates are bad for banks’ profits because they narrow the difference between that the likes of Lloyds can offer to borrowers and savers.

Profits leap at Lloyds

Latest financials from Lloyds illustrate how remarkably strongly the FTSE 100 bank is performing as economic conditions rebound. It recorded profits of £3.9bn for the six months to 2021, swinging from a £302m loss in the same period last year.

Strong momentum across the business drove net income 2% higher year-on-year at £7.6bn. The profits column also benefited from a net impairment credit of £837m thanks to the improving outlook for the UK economy. Lloyds and its peers stashed away billions in 2020 to cover the cost of the public health emergency.

Its sharp rebound encouraged Lloyds to reinstate interim dividends and to pay a 0.67p per share reward for the first half. Today’s NIESR forecasts have added weight to the belief that the bank’s profits could continue to soar.

Why I won’t buy

Lloyds is clearly a UK share with the wind in its sails. But it’s a FTSE 100 share that I’m still not prepared to buy for my own shares portfolio. This isn’t just because I think low interest rates will have to remain in  place to help the economy battle the twin problems of Covid-19 and Brexit.

It’s also because Lloyds and its established peers also face incredible competition from the challenger banks. Not only do these companies offer a more sophisticated digital operation than their FTSE 100 rivals. Their greater flexibility allows them to meet the needs of customers and small and medium businesses often more quickly and effectively. They commonly offer superior products due to their lower cost bases as well. This all explains why UK banking customers are flocking to them in huge numbers.

Sure, the Lloyds share price might be cheap. The firm trades on a forward P/E ratio of just 7 times right now. But it still carries too much risk to encourage me to invest. I’d rather buy other cheap UK shares today.

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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.

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