The FTSE100 has been on an impressive path of success so far this year. Although the British economy is still far from being back on track, progress in the fight against inflation has boosted investor confidence. The British benchmark index has risen by double digits since mid-January, and Lloyds (LSE:LLOY) shares do not seem to be spared from this development.
Over the same period, the banking giant’s valuation has risen by almost a third, pushing its share price above 50p for the first time in over a year. But despite this impressive rally, the stock is still trading well below pre-pandemic levels – and that’s despite massively improved earnings. So, are these cheap shares worth buying today?
Benefit from interest
On the profit side of the equation, Lloyds is breaking records. The FTSE 100 bank posted a new record for pre-tax profits in 2023, up 57% year-on-year to £7.5 billion. There are a lot of moving parts behind this performance improvement. But it’s no secret that higher interest rates have been a boon. That’s why management increased the dividend from 2.4p to 2.76p and launched a new £2 billion share buyback program.
One looming concern is the threat of interest rate cuts by the Bank of England. After all, self-service checkouts may soon be coming to an end, with inflation now close to the central bank’s target. But this concern may be unfounded.
Higher interest rates are good for banks’ profits as long as borrowers can make their payments. And there are some problematic economic trends that suggest this is becoming increasingly difficult. For example, private company bankruptcies in the UK have soared, and the number of late mortgage payments is also rising.
If left unchecked, these trends could prove to be a massive problem for Lloyds as its loan book turns from an asset into a liability. Therefore, rate cuts could be beneficial. The bank’s net interest margin could suffer. However, loan affordability will improve, reducing the risk of default among existing customers while attracting new ones.
With that in mind, these stocks certainly sound interesting, especially at a price-to-earnings ratio of just 7.4. So what’s the catch?
What is the problem?
Like most banking institutions, Lloyds has been involved in many scandals. And the company may be in the middle of another one today. Regulators are investigating the group for criminal activities in the area of car financing. Lloyds has already set aside £450 million to settle the claims.
However, regulatory investigations are not the only problem that is holding back Lloyds’ share price. The company generates almost all of its revenue in the UK, making it very sensitive to the British economy. In the short term, this is proving to be an advantage. In the long term, however, it is a small headwind.
Even before Covid-19 and the inflation that came with it, the UK was struggling to achieve any meaningful growth. And this trend could continue even when inflation is no longer in the headlines. At least, that is what KPMG’s current forecasts suggest. Growth is expected to be a whopping 1% by the end of this decade.
So this FTSE 100 share may be cheap for a reason. And since there are other, more promising companies in the financial space, it’s not a stock I’d want to buy today.
The post “Should I buy cheap Lloyds shares as the FTSE 100 rises?” appeared first on The Motley Fool UK.
Further reading
Zaven Boyrazian does not own any of the stocks mentioned. The Motley Fool UK has recommended 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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