There aren’t many stocks on the FTSE 100 that I’m quite as indifferent to as the banks. Let’s use the Lloyds (LSE: LLOY) share price as an indication. It’s taken an almighty beating since the Covid-19 crisis emerged on these shores and battered the UK economic outlook. As I type, it’s falling again, back towards April’s eight-year closing lows.
Don’t be fooled into thinking Lloyds Banking Group will rebound as Britain gradually recovers from the coronavirus catastrophe however. In truth, the business has a variety of serious — and long-established — problems that threaten to overshadow it for years. It’s why the Lloyds share price was sinking long before the pandemic even emerged, down almost 20% in the five years to the beginning of 2020.
Therefore, there’s clearly plenty that potential buyers need to consider before taking the plunge with Lloyds.
Lloyds’ rate pain
The problem of low interest rates has been an obstacle for the entire UK banking sector for more than a decade. The continuation of ultra-loose monetary policy from the Bank of England has meant the Lloyds share price, along with those of its blue-chip peers, has underperformed the broader FTSE 100 ever since the 2008/2009 financial meltdown.
It’s an issue that’s likely to get worse before it gets better, with Bank of England chief Andrew Bailey touting the possibility of negative interest rates before too long.
Penalties piling up
Fears over future monetary policy dominate investor thinking around Lloyds. So do concerns over how far Covid-19 and Brexit will damage the bank’s bottom line. But one extra thing that puts me off Britain’s banks is the steady drip-drip of financial penalties related to previous misconducts.
Last week, Lloyds was fined £64m by the FCA for unfair treatment of some of its mortgage customers. It follows a £46m penalty doled out in the autumn for its failure to disclose fraud at a branch in Reading more than a decade ago.
New claims for the mis-selling of PPI — a scandal which has so far cost the bank somewhere in the region of £22bn — is no longer something it has to worry about. But the steady stream of financial penalties related to other previous wrongdoings continues to chip away at profits. Who knows what will pop up next.
Bags of debt
All of the aforementioned issues would be bad at the best of times. But the state of Lloyds’s balance sheet adds another layer of worry for its investors right now. The bank already carries eye-watering amounts of leverage, and while it continues to scrape past Bank of England stress tests, it’s in danger of falling flat on its face before long.
Remember the Lloyds share price isn’t actually that cheap. At 30p per share, it sports a price-to-earnings (P/E) ratio of around 20 times. This soars above an average of 6-7 times which it was trading on before the Covid-19 crisis.
And remember, Lloyds no longer boasts the show-stopping 6% yields to offset its higher earnings multiple, following its decision to axe dividends in line with FCA guidance.
In my opinion, the bank offers plenty of risk and little else at current prices. I’d much rather invest in other cheaper FTSE 100 shares right now.