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He Lloyds Banking Group (LSE:LLOY) share price has moved back one step in February. But the bank is still 12% more expensive than at the beginning of 2023.
Like billionaire investor Warren Buffett, I’m a big fan of value stocks. And at around 52.7 pence a share, Lloyds shares continue to sell well, at least on paper.
He FTSE 100 the bank operates with a forward price-earnings (P/E) ratio of just 5.3 times. It also has a dividend yield of 5.7% which outperforms the index right now.
4 big risks for Lloyds shares
Stronger-than-expected economic data from Britain has boosted Lloyds’ share price. It has led to speculation that the UK-focused bank could turn out better earnings than City analysts forecast.
This is possible and could send the stock price up considerably. But for me the risks of investing in the FTSE business are still too high at the moment. Here are four reasons why I’m avoiding bank stock today.
Interest rate uncertainty
Higher interest rates have boosted bank profits over the past year. And further increases are forecast in the coming months, amplifying the profits Lloyds makes from its lending activities.
But rates could fall considerably later in 2023 as inflation normalizes and the Bank of England tries to stimulate the economy. Traders and economists have steadily lowered their rate expectations in recent weeks and this is something investors should keep an eye on.
growing deteriorations
Credit impairments are skyrocketing at UK banks and Lloyds itself set aside £1.5bn in 2022 to cover bad loans. As consumers and businesses feel the pinch, spoilage fees could continue to rise.
I am especially concerned about the huge debts that people are running up during this cost of living crisis. Credit card lending in the UK reached its highest level since 2004 at the end of last year. Banking companies could be sitting on a time bomb.
The weak housing market
Lloyds could be in particular danger given its position as Britain’s biggest mortgage provider. The Financial Conduct Authority has warned that 750,000 homeowners could default on their loans in the next two years.
On top of this, banks can expect the profits they make on their mortgage transactions to decline as property prices fall. Zoopla says that 40% of the properties listed on its website have had to reduce their asking price as buyer demand wanes.
growing competition
Finally, established banks are losing their market shares as consumers turn to challenger banks. Its impressive customer satisfaction scores and attractive products are causing major disruption at Lloyds.
The problem could also worsen as the regulator considers relaxing the rules on new banks to improve competition. He said that taking action in areas such as bank disclosure “remove barriers to entry.”
The verdict
When combined, I think all these dangers make Lloyds shares too risky today. There are plenty of cheap dividend stocks in the FTSE 100 with brighter trading prospects than Black Horse Bank. So I prefer to buy other value stocks for my portfolio.
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