The FTSE 100 continues to bounce back as concerns over a fresh banking crisis recede. The Lloyds Banking Group (LSE:LLOY) share price for example is up 4.7% in Tuesday trading above 48p.
The Black Horse Bank continues to trade at a sizeable discount to levels recorded just a week ago, however. This suggests that this week’s rally could have further to run.
All things considered, Lloyds might look too good to miss for lovers of value stocks like me. The bank shares trade on a price-to-earnings (P/E) ratio of 6.4 times for 2023. They also carry a juicy 6% dividend yield, well ahead of the 3.8% FTSE 100 average.
All things considered, Lloyds might look too good to miss for lovers of value stocks like me.
Cheap but risky
But on balance I believe Lloyds shares remain too risky, even at current prices. And I’m not even talking about the threat of contagion in the banking sector following Silicon Valley Bank’s collapse.
At this stage a British banking disaster doesn’t look on the horizon. Encouragingly the Bank of England has claimed that “the UK banking system is well capitalised and funded, and remains safe and sound”.
I am worried about the potential fallout of the bank crisis on Lloyds’ profits, though. More specifically, policymakers may postpone or cancel further interest rate rises. Such a move could reduce the difference between the interest that banks charge borrowers and what they give to savers.
The Bank of England may continue to tighten policy given the prospect of enduring high inflation to the benefit of retail banks. But speculation is rising that rate hikes will come to an end to soothe market volatility.
A decision by policymakers could go either way. But this is just one several big risks to Lloyds’ earnings in the near term and beyond.
Other dangers to Lloyds
For one, banks are among the most cyclical companies out there. When economic conditions become challenging profits can fall off a cliff. Lloyds itself chalked up £1.5bn of loan impairments last year as consumers and businesses struggled.
Unfortunately economists expect the British economy to remain sickly for some time, too. The OECD, for example, expects UK GDP to shrink in 2023 and to rebound less than 1% next year.
Lloyds has no exposure to overseas territories to offset weakness at home. So unlike other FTSE 100 banks like Barclays and HSBC it can’t look to foreign clients to drive its bottom line.
Here’s what I’m doing now
Buying UK shares on the dip can be a great way to build wealth. Just ask Warren Buffett, who has made billions by investing in stocks when markets fall.
Yet I believe buying Lloyds remains a bad idea in spite of recent share price falls. There are plenty of other FTSE 100 stocks that are currently trading on rock-bottom valuations. So I’m looking for other cheap blue-chip shares to buy.
