Thinking that cheap Lloyds stocks are inexpensive now must be a strong enough justification if we’re talking about buying them.
Well, given the recent declines, the share price does appear to be very low.
Reasons to buy cheap Lloyds stocks today
Although a beautiful low valuation is beneficial, we just consider it a plus. We mean, we’ve previously purchased shares that we believed to be absurdly undervalued. subsequently lost money using them.
It turned out that the companies just weren’t that good. But what factors can influence our decision to purchase cheap Lloyds stocks today?
We want to see financial stability first. Banks in particular may suffer during difficult economic times. We don’t believe any investor will soon forget about the Great Bank Crash of 2008.
In that regard, Lloyds recently disclosed its results for the 2022 Bank of England (BoE) stress tests. The bank’s balance sheet is put to a rigorous test of economic stress during those exams.
We won’t go into every figure. However, according to Lloyds, the test was “comfortably passed”. Additionally, it need not take any drastic measures.
The greatest risk for this year may still be financial stress. However, the BoE appears to be content, which is encouraging.
We then want to look at necessary items or services. The banks are essential to the functioning of the UK. And in our opinion, this makes the financial industry one of today’s most crucial industries. Think that eating is more significant? How could it move from the fields to our plates without a financial system?
We’d suggest that banks are relatively safe from entrants due to their high capitalization. After the major crisis, challenger banks started to flourish. The big players were in trouble, but the new competitors made very little actual progress.
All of this wouldn’t matter if a company didn’t make money for its owners. And Lloyds has a long history of disbursing copious amounts of the stuff.
Yes, there have been awful moments, and there may be more. Any indication of bad debt issues could cause a slight financial crunch, especially given that Lloyds has significant exposure to mortgages.
That can reduce the dividend. In turn, this would frighten off investors once more, which would cause Lloyds shares to decline further.
Reasons to avoid cheap Lloyds stocks
Here are a few reasons why you ought to stay away from cheap Lloyds stocks right now.
It is evident that the UK economy will struggle in the near- to medium-term. As long as there is significant inflation, which puts pressure on both people and businesses, the cost-of-living crisis seems to extend well into 2024.
It is understandable why credit impairments at UK retail banks have been on the rise. Since the start of 2022, Lloyds has had to set aside about £1.8 billion to cover problematic loans. When the results for the first half of the year are disclosed on July 26, we anticipate hearing about yet another round of profit-eroding defaults.
Slow loan growth
Rising prices indicate that interest rates are likely to continue rising. Analysts in the city now predict that rates will peak at 6.5%, up from the current 5%. As a result, Lloyds might anticipate an increase in its net interest margin (NIM), which is the gap between the interest it charges borrowers and the interest it pays savers.
However, as loans, credit cards, and other financial products become more pricey, increased interest rates also put the market for these items in jeopardy. As the cost of servicing these high-value loans increases beyond affordability, demand for mortgage products in particular may decline.
Mortgage approvals are sluggish and in April reached their lowest point since the financial crisis. Given its status as the largest provider of house loans in the nation, this is a huge thing for Lloyds.
In the meantime, banks are coming under increasing pressure to better pass along higher interest rates to savers. Therefore, the future impact of higher NIMs in counteracting increased impairments and sluggish loan growth appears to be significantly diminished.
Recently, lenders have been accused of “profiteering” by boosting loan charges faster than savings rates, according to members of the Treasury Select Committee. High street banks have also been urged by the Financial Conduct Authority (FCA) to “accelerate” efforts to improve saver benefits.
Given the intense level of competition they face, Lloyds and its competitors may be pushed to raise depositors’ rates in any case. In recent weeks, the FCA stated that it is “increasingly seeing customers switching” in search of higher returns on their money.
The pressure on banks to give better loan rates is also increasing due to the fierce competition from challenger banks and building societies, further reducing their profit margins.
As we said, on paper, Lloyds shares appear to be incredibly inexpensive. However, we think this accurately captures the vast breadth of dangers it presents to investors. We’re now purchasing additional FTSE 100 shares in light of recent market turbulence.