One might think Lloyds Banking Group (LSE:LLOY) is one of the FTSE100The biggest bargains from .
At 59p per share, Black Horse Bank looks cheap on many levels. It trades at a forward price-to-earnings (P/E) ratio of 9.2 for 2024. It also offers a 5.5% dividend yield that will outperform the Footsie.
Finally, a price-to-book ratio (P/B) of 0.9 indicates that the company is trading at a discount to the value of its assets.
While the future looks bright, I believe Lloyds shares could be a classic “value trap.” Here are three reasons why I’m avoiding the company right now.
1. Interest rate uncertainty
Hopes for rate cuts have driven up bank share prices this year. However, I believe the Bank of England (BoE) may not cut rates as much as the market expects. Banks are at risk of seeing a drastic change in policy.
On the one hand, higher interest rates would be good for banks because they would increase their net asset margins (NIMs). At times like these, the gap between the interest rates they charge borrowers and those they offer savers is widening.
However, higher interest rates also put pressure on banks’ loan growth and drive up impairments. This is particularly bad for Lloyds, as it is the UK’s largest mortgage lender.
With inflation data coming in higher than expected on Wednesday (July 17), economists expect the first rate cuts to come in September, later than previously expected. This trend could continue as wage growth continues to boom.
2. Growing competition
Increasing competition is a longer-term problem for established banks like Lloyds. Indeed, the pace at which this threat is growing was underlined this week by data from Moneyfacts.
According to the report, the number of savings products on the market rose to over 2,000. This is the highest level since May 2012 and reflects an increase in the number of savings providers to record levels.
Thanks to the strong Lloyds brand, the company performs better than many other traditional banks. However, I fear that the company is increasingly swimming against the tide. Several challenger banks are about to go public to boost their growth plans. Revolut is also pushing hard for a banking license to significantly expand its product range.
3. Better banks to buy?
In conclusion, I believe there are much better bank stocks for me to buy today than Lloyds. HSBC And Santanderfor example. These UK stocks also trade at very low P/E ratios of 6.9 and 6 times respectively. In fact, these are better than Lloyds’s, which is over 9 times.
On the other hand, they face the same problems: increasing competition and persistently high interest rates. But thanks to their enormous presence in emerging markets, they also have enormous growth potential.
HSBC, for example, believes that markets such as China and Hong Kong will help it achieve double-digit profit growth. Lloyds has less chance of achieving such results because it focuses on the saturated British retail market.
There are many top FTSE 100 stocks to choose from these days, so I see no reason to invest my money in risky Lloyds.
The post Lloyds share price is dirt cheap! But I’d still avoid it like the plague appeared first on The Motley Fool UK.
Further reading
HSBC Holdings is a promotional partner of The Ascent, a Motley Fool company. Royston Wild does not own any of the stocks mentioned. The Motley Fool UK has recommended HSBC Holdings and Lloyds Banking Group Plc. The views expressed on companies mentioned in this article are those of the author and may therefore 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.
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