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On paper, the Lloyds Banking Group (LSE:LLOY) share price offers excellent value for money. This explains why dip buyers are piling into the market. FTSE 100 company following recent share price weakness.
In the seven days to Thursday, Lloyds was the second most bought stock and investors used Hargreaves LansdownThe commercial platform. It was also responsible for the third highest number of “buy” orders in AJ Bell also.
Today, Black Horse Bank trades on a forward price-to-earnings (P/E) ratio of 5.6 times for 2023. It also offers a forward-looking dividend yield of 6.7% as an additional sweetener and may well have a promising future ahead. .
However, some UK shares are trading cheaply for good reason. And Lloyds faces some major risks heading into 2024. It’s also why the banking giant recently closed at its cheapest level in two-and-a-half years, below 40p a share.
I plan to avoid Lloyds shares in the New Year. Here are three reasons.
1. The economic outlook
The Bank of England’s (BoE) monetary tightening may largely be a good thing for banks. It lays out the difference between what these companies charge borrowers and the interest they offer savers (known as net interest margin or NIM).
A series of interest rate rises helped Lloyds’ net income rise by a further 7% between January and September to £13.7bn. And if inflation remains high, the central bank could take further action.
However, the possibility of further boosts to the bank’s NIM is offset by the possibility of the UK economy collapsing. This week, the Bank of England warned that there is a 50% chance of a recession in the next 12 months.
Such a scenario threatens to stifle loan growth. Furthermore, it means credit impairments are likely to continue to rise (Lloyds set aside another £849m to cover bad loans in the nine months to September). This combination could prove disastrous for profits.
2. The real estate market
As the country’s largest provider of home loans, Lloyds is hugely vulnerable to a crisis in the UK property market. The news on this front has not been encouraging either. Bank of England data showed net mortgage approvals for home purchases fell to eight-month lows in September.
Demand for home loans could also remain weak beyond 2024, if the central bank’s warning holds true.”that monetary policy is likely to need to be restrictive for an extended period”becomes reality. Of course, defaults on these expensive loans could also skyrocket.
3. Growing competition
As if the difficult economic outlook were not enough, traditional banks such as Lloyds are also steadily losing customers to challenger and specialist banks.
In 2022, these new kids on the block”represented more than half of the gross loan” to small businesses, according to the British Business Bank. Their industry-leading products and strong customer service scores mean they look set to continue gaining market share in the personal and corporate categories as well.
Lloyds is having to spend a fortune to take on these disruptors, putting additional pressure on profits. Operating costs rose 5% (to £6.7bn) from January to September, partly due to heavy spending on digitalisation.
Ultimately, Lloyds faces significant dangers in 2024 and well beyond. So I prefer to avoid it and look for other FTSE 100 value stocks to buy in my portfolio.
