FTSE 100-listed Lloyds Banking Group (LSE:LLOY) looks like one of the greatest bargains on the London Stock Exchange. At 41.8p per share, it offers exceptional all-round value, based on broker forecasts.
For 2024, Lloyds shares trade on a price-to-earnings (P/E) ratio of 6.1 times. This is well below the Footsie average of 11 times.
Meanwhile, a forward dividend yield of 7.6% is almost double the average of 3.9% for FTSE 100 shares.
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So why am I not interested the Black Horse Bank? It’s one of Britain’s leading retail banks and has a large and loyal customer base. And now could be a good time to buy its shares as the housing market shows early signs of turning the corner.
Yet despite this, Lloyds’ share price has slumped 22% during the past 12 months. I think it could continue falling in value. Here are just three reasons why.
1. Rate cuts don’t happen
Britain’s banks have got off to a stinker in 2024 as hopes of imminent interest rate cuts have shrunk. News that inflation sped up in January has tempered expectations of interest rate cuts in the spring.
Price rises could remain stubbornly high too amid new Brexit trade rules and if conflict in the Middle East intensifies, affecting shipping routes and pushing up crude prices.
On the one hand, higher interest rates are good for banks as they boost net interest margins (NIMs). These are the difference between the interest banks charge borrowers and offer savers, and are a key gauge of profitability.
But in current periods of economic turmoil they can be counter-productive by sending loan impairments through the roof. Lloyds had already racked up bad loans of £2.4bn between January 2022 and September 2023.
2. Mortgage arrears surge
Higher-than-normal interest rates, combined with the weak state of the UK economy, also mean that mortgage arrears and property repossessions could keep increasing.
This is concerning for Lloyds given its position as market leader, and could weigh further on its share price (the bank has a 19% share of the home loans market).
Data from UK Finance last week underlines the danger the bank finds itself in. This showed the number of homeowners in mortgage arrears rose 7% between the third and fourth quarters of 2023.
In better news, the number of homeowner property repossessions dropped quarter on quarter. But this was offset by an increase in the quantity of buy-to-let seizures.
3. Growing competition
The danger to Lloyds’ margins have been under pressure as challenger and digital banks, along with building societies, battle to offer the most attractive products. This has seen a surge in the number of customers flocking to them from traditional retail banks.
The fight for Lloyds and its established peers is set to get worse too, further impacting its ability to grow revenues in the mature UK market.
Payments specialist Ayden and mortgage provider Perenna both secured banking licences to trade here late last year. And Revolut’s long-running struggle to receive one could be seismic for the industry if it eventually proves successful.
These are just a few of the risks to Lloyds and its share price in 2024 and beyond. While it’s cheap, I’d rather find other FTSE 100 stocks to invest in today.
