The Lloyds Banking Group (LSE:LLOY) share price has leapt 15% in 2023. Yet on paper the bank still looks like one of the FTSE 100’s best value shares.
Today the shares trade on a forward price-to-earnings (P/E) ratio of 7.1 times. This is well below the FTSE index average of around 13.5 times.
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It also carries a chunky 5.3% dividend yield for 2023, well ahead of the 3.6% FTSE 100 average.
So why is Lloyds’ share price this cheap? And should I buy the bank for my portfolio? Here are two reasons why it commands such a low rating today.
#1: A worsening economic outlook
Banks are among the most cyclical stocks out there. When economic conditions worsen, revenues can tank while bad loans can head through the roof.
Lloyds itself has already booked more than £1bn worth of loan defaults. And more hefty impairment charges are likely when it releases full-year results on Wednesday, 22 February.
High street rival Virgin Money put aside an extra £66m for the three months to December, it announced last week. It underlines the huge stress Britains banks face in 2023 and potentially beyond.
Worryingly for the banks, the UK economic picture is bleak and is getting gloomier week after week. This is a particular problem for Lloyds given its focus on British customers.
Last week the International Monetary Fund (IMF) slashed its growth forecasts for 2023. It now expects Britain’s GDP to shrink 0.6% this year, a revision from its October estimate for growth of 0.5%.
The IMF believes the UK will be the only major economy to reverse in 2023. In fact the body upgraded its global growth forecasts to 2.9% from 2.7%. Investing in banks that have overseas operations may be a better option for me in the current climate.
#2: A sinking housing market
All of Britain’s major banks have a share of the homes loans market. But Lloyds is especially exposed to a downturn in the housing sector. It controls around 18% of the mortgages market.
Okay, the long-term outlook for the home loans market is robust. As the UK population steadily grows and homebuilding rises demand for mortgages will naturally rise. And Lloyds could be in the box seat to exploit this growth.
However, tough conditions in the interim could smack the bank’s profits and hamper its ability to pay big dividends.
Bank of England data last week showed mortgage approvals collapsed to 35,600 in December from 46,200 the previous month. This was also the lowest figure since May 2020 when Covid-19 lockdowns were in place.
Higher interest rates and tough economic conditions are also driving an alarming rise in the number of people facing mortgage default.
Would I buy Lloyds shares?
I believe that Lloyds’ share price is cheap for good reason. And I won’t be buying the bank’s shares because of these threats. I’d rather invest in other cheap UK shares for passive income in 2023.
