Higher interest rates have helped support the Lloyds Banking Group (LSE: LLOY) share price in 2022.
They’ve helped widen the profits the bank has made on its lending activities. More support from the Bank of England’s rate setting committee can be expected, too.
But this doesn’t mean I’d buy the FTSE 100 bank today. Here are just three reasons I’m avoiding Lloyds shares today.
1. A collapsing housing market
Lloyds is a major player in the UK mortgages market. Unfortunately for the bank, this sector is critical in driving the bottom line.
Data today from Nationwide showed home sales fall for the first time in 15 months in November. Demand from homebuyers fell because of soaring interest rates to tame inflation and support the flagging pound.
They’ve risen by half a percentage point at the last two Bank of England meetings. And an even-bigger 0.75% hike is predicted at the latest meeting this Thursday. No wonder Lloyds is tipping home sales to fall 8% in 2023.
2. Broad-based weakness
Surging interest rates threaten to crush demand for mortgage products in the short-to-medium term. There’s also a danger of missed home loan payments increasing to eye-popping levels.
This partly explains why Lloyds set aside another £668m for bad loans provisions in the third quarter. It caused the bank to miss City profit forecasts. And more are likely to be coming down the pipe as the UK economy toils.
The problem for Lloyds, however, is that it faces weak revenues growth and a surge in loan impairments across the board. Indeed, total loans and advances clocked in at £456.3bn in the third quarter, basically flat from the prior three months.
That’s the trouble with investing in highly cyclical shares like banks. Profits can soar when the economy is thriving. They usually sink when times get tough.
3. Lack of overseas exposure
But Lloyds offers an extra layer of risk to investors. Its focus on the British retail banking sector means it doesn’t benefit from geographic diversification.
Unlike Barclays, HSBC, and Standard Chartered, for instance, it can’t look to other markets to drive earnings during tough periods at home. This is particularly troublesome today as Britain’s economy is expected to perform particularly badly over the short-to-medium term.
The IMF, for example, has forecast UK growth of just 0.2% in 2023. This is well below the 2.7% that the broader global economy is tipped to grow at.
Cheap for a reason
Lloyds’ share price
12-month price movement
Forward price-to-earnings ratio
Forward dividend yield
It’s true that Lloyds’ shares look enormously cheap on paper. It trades on a forward price-to-earnings (P/E) ratio of below 10 times. Its dividend yield meanwhile smashes the FTSE 100 average of 4%.
But I don’t consider Lloyds’ share price as a bargain. Brokers now expect earnings to drop year on year in both 2022 and 2023. And I think more forecast downgrades could be in store. This is a high-risk UK share I plan to avoid at all costs.
Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays, HSBC Holdings, Lloyds Banking Group, and Standard Chartered. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2022