The price of Lloyds Stock has increased as a result of Britain’s economic data exceeding expectations. It has given rise to rumors that the UK-focused bank may fare better financially than City analysts had anticipated.
This is conceivable and could greatly raise the Lloyds Stock price. But, the current level of risk for us makes investing in the FTSE business unwise. We are staying away from the bank’s shares today for the following four reasons.
Interest rate uncertainty
Over the past year, higher interest rates have increased bank profits. In the upcoming months, additional increases are anticipated, which will increase the earnings Lloyds Stock makes from its lending activity.
Prices may, however, decline even further later in 2023 as the Bank of England works to boost the economy and inflation restores to normal. Investors should keep an eye on the rapidly declining rate estimates among traders and analysts in recent weeks.
The number of credit impairments is rising across all British banks, and Lloyds itself set aside £1.5 billion in bad loan reserves for 2022. As consumers and companies continue to experience the effects, impairment charges could increase further.
We are most concerned about the enormous debts that people are amassing as a result of the current cost-of-living problem. Late last year, credit card borrowing in the UK reached its highest level since 2004. Banking companies might be sitting on a ticking time bomb.
Weak housing market
Given its status as the largest provider of mortgages in the UK, Lloyds Stock may be particularly vulnerable. The FCA estimates that 750,000 homeowners could default on their debts in the next two years.
Also, banks should anticipate that if real estate prices decline, their revenues from their lending operations will decrease. As buyer demand dwindles, according to an estimate by Zoopla, 40% of the properties posted on its website have had to lower their asking prices.
Finally, as customers turn to challenger banks, conventional banks are seeing their market shares erode. Their appealing products and high customer satisfaction ratings are seriously disrupting Lloyds.
While the regulator considers relaxing regulations on new banks in an effort to increase competition, the issue could also get worse. Acting “removes barriers to entrance” in fields like bank disclosure, according to the statement.
Will the share price of Lloyd’s fall in 2023?
Another share price drop for Lloyds Banking Group (LSE: LLOY) would be unimaginable, right? As a shareholder, we don’t think it will. There are hazards, too, so let’s address them before we discuss my optimism.
The FTSE 100 may have been rising as it temporarily crossed the 8,000-point barrier. Yet, the share price of Lloyds has appeared much less positive.
All we can say is that it’s wonderful to see it above 50p. Just 4.5% has been gained by Lloyds stock during the past year. And we’ve fallen short of the January 2022 peak.
Investors anticipated that higher interest rates would significantly impact bank profits. After all, they ought to increase loan margins.
We have observed some of that throughout the current bank reporting season. Yet it didn’t provide the kind of boost that some observers had anticipated. Also, the past two weeks have been unfavorable for bank shares generally.
Lloyds’ FY22 results appeared adequate to me. Profits stayed the same. Yet, the bank has enough capital to increase its dividend by 20% to 2.4p per share. It exceeds inflation, even the current extraordinarily high inflation.
In addition, Lloyds would repurchase up to £2 billion of its own stock, displaying its belief in its capacity to generate cash.
Why then do markets not seem enthused by Lloyds’ most recent numbers? Interest rates are a major source of worry. Will their elevation last longer than anticipated? That’s one idea that’s now circulating in the US.
For the biggest mortgage lender in the UK, a housing shortage is also a negative thing. Higher loan margins may be quickly offset by declining lending and mortgage defaults.
These particular concerns for Lloyds could cause the shares to decline once further in 2023. Additionally, they might fall even further as a result of global uncertainty and new bearish doom.
But for me, fundamental valuation is what really matters. A trailing price-to-earnings (P/E) ratio of 7.4 is what we’re looking at, which is roughly half that of the FTSE 100. According to projections, the shares will decrease in price on that metric over the ensuing two years.
Experts predict that the dividend yield would increase to 6%, which we’d be thrilled to receive.
Basically, we observe risk. And we consider the likelihood of a decline in share price this year to be significant. Yet, we believe that the extremely low fundamental value offers more than enough downside protection.
Moreover, if Lloyds’ stock does drop significantly, it might be a superior investment.
Also read: Two Cheap Dividend Paying Stocks