On paper, the Lloyds Banking Group (LSE:LLOY) share price offers exceptional all-round value for money. This explains why dip-buyers are piling into the FTSE 100 company following recent share price weakness.
In the seven days to Thursday, Lloyds was the second-most bought stock with investors using Hargreaves Lansdown‘s trading platform. It was also responsible for the third-largest number of ‘buy’ orders at AJ Bell too.
Today, the Black Horse Bank trades on a forward price-to-earnings (P/E) ratio of 5.6 times for 2023. It also carries a 6.7% prospective dividend yield as an added sweetener and may well have a rosy future ahead of it.
However, some UK shares trade cheaply for good reason. And Lloyds faces some significant risks going into 2024. It’s also why the banking giant recently closed at its cheapest for two-and-a-half years below 40p per share.
I plan to avoid Lloyds shares in the New Year. Here are three reasons why.
1. The economic outlook
Bank of England (BoE) monetary tightening can largely be a good thing for banks. It raises the difference between what these companies charge borrowers and the interest they offer savers (known as the net interest margin, or NIM).
A string of interest rate gains helped Lloyds’ net income rise another 7% between January and September, to £13.7bn. And if inflation remains high, further action from the central bank could be taken.
Yet the possibility of further boosts to the bank’s NIM is outweighed by the possibility than Britain’s economy might tank. This week, the BoE warned that there is a 50% chance of a recession in the next 12 months.
Such a scenario threatens to choke off loan growth. Furthermore, it means that credit impairments would likely keep climbing (Lloyds set aside another £849m to cover bad loans in the nine months to September). This combination could prove disastrous for profits.
2. The housing market
As the country’s largest home loans provider, Lloyds is massively vulnerable to a meltdown in the UK housing market. News on this front has hardly been encouraging either. BoE data showed net mortgage approvals for house purchases slump to eight-month lows in September.
Demand for home loans could remain weak beyond 2024 too, if the central bank’s warning “that monetary policy is likely to need to be restrictive for an extended period of time” becomes reality. Of course, defaults on these expensive loans could also balloon.
3. Rising competition
As if the tough economic landscape wasn’t enough, incumbent banks like Lloyds are also steadily losing customers to challenger and specialist banks.
In 2022, these new kids on the block “accounted for over half of gross lending” to small businesses, according to the British Business Bank. Their sector-leading products and strong customer service scores mean they look set to keep grabbing market share across the personal and corporate categories too.
Lloyds is having to spend a fortune to take on these disruptors, putting extra stress on earnings. Operating costs rose 5% (to £6.7bn) from January to September, in part due to heavy spending on digitalisation.
On balance, Lloyds faces significant dangers in 2024 and long beyond. So I’d rather avoid it and search for other FTSE 100 value stocks to buy for my portfolio.
