The Lloyds (LSE:LLOY) share price has seen solid gains since the beginning of 2023. And at current prices the FTSE 100 bank still seems to offer excellent value for investors.
For this year the business trades on a price-to-earnings (P/E) ratio of 6.8 times. It also boasts a market-beating 5.7% forward dividend yield.
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But I’d rather buy other FTSE index value stocks right now. Here are three reasons why I’m avoiding Lloyds shares.
#1: Interest rate disappointment
Higher interest rates have provided a boost to Britain’s banks since the end of 2021. This is because Bank of England action has boosted the margins between what the banks offer to borrowers and to savers.
Rates look set to continue rising too as inflationary pressures persist. But I’m worried that they might not move as high as many predict, putting current earnings estimates for Lloyds in danger.
In fact market estimates continue steadily declining and a peak of 4.25% is now the consensus bet for 2023, down from 4.5% just a few weeks ago. This reflects expectations of falling energy prices that will temper inflationary pressures.
Investors also need to consider that the Bank of England might slash rates again more sharply than expected in the second half of the year to support the ailing domestic economy.
#2: Increasing impairments
I’m also concerned by news that personal debt levels are surging in the UK. The number of people in mortgage arrears is soaring and tipped to rise above 750,000 in the next couple of years, for example.
This is a worry for Lloyds as the country’s biggest home loans provider. Bad loans could be set to soar elsewhere too as people rack up debts to make ends meet. Latest UK Finance data shows outstanding credit card balances jumped 10.1% (to £59.7bn) in the 12 months to October.
Lloyds stashed away £1.05bn in the first nine months of 2022 to cover loan impairments. I’m expecting more hefty, profit-sapping charges to come as the year progresses.
The bank’s underlying profit dipped 7% to £5.5bn between January and September due to heavy impairments.
#3: Soaring competition
At the same time, Lloyds’ earnings threaten to be further eroded by the growing popularity of digital and challenger banks.
These industry disruptors have much lower cost bases due to their lack of physical locations. This allows them to offer more favourable product rates, better customer rewards and lower costs than their established rivals.
As a consequence the digital operators have rapidly grabbed market share from the likes of Lloyds. It’s a trend that looks set to continue, too, even as the high street banks close branches to better compete.
As I say, Lloyds shares look cheap on paper. But this reflects the huge threats to the company’s current earnings forecasts. I’d rather invest in other cheap UK shares today.
