Lloyds (LSE: LLOY) shares are popular with UK investors and it’s easy to see why. For starters, the FTSE 100 stock is dirt cheap. Secondly, the bank is now paying dividends again.
Yet looking at the investment case for Lloyds, I see a couple of major risks. I think these risks could potentially push the share price down in the years ahead. Here’s a look at what concerns me.
Downside risk to Lloyds’ share price
The first major risk that I believe could hit the share price is a UK recession. I think there’s a real possibility that we could see a recession in the near future. A lot of consumers are feeling the pinch due to soaring prices. We seem to be in the midst of a real cost-of-living crisis.
Meanwhile, the Russia-Ukraine war is impacting business confidence (which affects spending). A monthly survey by Lloyds published last week showed business confidence fell by 11 points to 33% last month – the biggest month-on-month drop since the start of the Covid-19 pandemic.
A recession would be bad news for Lloyds, as it’s essentially a proxy for the UK economy, and highly ‘cyclical’. If the economy goes downhill, Lloyds’ profits, and share price, would most likely go downhill too.
Of course, if costs fall, and economic conditions improve, we may not see a recession in the near future. However, I think it’s something to keep in my mind.
As Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said recently: “No one should rule out a decline in households’ real expenditure this year that could drag the overall economy into a recession.”
Long-term threat
The second major risk I believe could impact Lloyds’ share price is competition from new digital banks and FinTech companies.
I’ve been talking about this risk for a while now, however, I was reminded of it last week when I saw an advertisement for JP Morgan Chase’s recently launched UK digital bank, called just Chase.
Given that the digital bank was offering an interest rate of 1.5%, I decided to open an account (via the app). And I was stunned at how easy the process was. Within less than five minutes, I was up and running with an account. This demonstrated to me just how easy it is for new entrants to capture market share from the traditional banks such as Lloyds.
Given the competition from new entrants, I’m concerned about the long-term outlook for Lloyds. And I’m not the only one who is concerned. Just recently, analysts at RBC double downgraded the stock from ‘outperform’ to ‘underperform’, stating that the bank’s growth drivers are not “game changing“. “The vision for the bank is too long-dated and comes with significant execution risk,” wrote RBC’s analysts.
Risk vs reward
I’ll point out that I do still think that Lloyds’ share price could have some upside in the short term. Higher rates from the Bank of England should help profitability. And if value stocks remain popular, it could benefit.
However overall, I don’t see the risk/reward proposition as very attractive right now. So, I recently sold my small holding in Lloyds.
Weighing up the risks versus the potential reward, I came to the conclusion that there were better opportunities in other areas of the market at the moment.
