On paper, Lloyds Banking Group appears to be one of the best-value FTSE 100 shares out there. At current levels of 48.8p, the Lloyds share price commands a forward price-to-earnings (P/E) ratio of 6.5 times. It also means the bank carries a chunky, inflation-beating 4.5% dividend yield.
I’m not falling over myself to buy Lloyds shares however. There are many stocks out there which appear to be genuinely undervalued by market makers. Others are simply dirt-cheap because they come with a whole load of risk.
I personally think the low Lloyds share price reflects the multitude of headwinds it faces in the near-term and beyond.
Rate talk
The Lloyds share price has risen 11% over the past month, taking total gains over the past 12 months to 80%. Buying interest has risen because soaring inflation has led to speculation that interest rates could rise sooner and more sharply than previously expected.
Higher rates are good for banks because they increase the difference between what they give savers and charge lenders, thus boosting profitability. Even Bank of England governor Andrew Bailey has suggested interest rate rises could be coming, possibly even by the end of the year.
While this would be good for Lloyds and its peers, likely rate rises won’t turbocharge profits at the FTSE 100 bank. Rates will likely remain not that far off current record lows of 0.1%, given the fragile state of the UK economic recovery, in my opinion.
In fact, there’s no guarantee rates will be lifted at all in the near future, given the impact of supply chain problems and the ongoing Covid-19 emergency on economic growth.
Two members of the rate-setting Monetary Policy Committee have warned in recent hours of the dangers of tightening monetary policy too soon. But the failure of policymakers to lift rates soon could yank the Lloyds share price sharply lower again.
Why I’m ignoring Lloyds’ low share price
The probability that interest rates will remain well below their historical norms isn’t the only reason I think Lloyds is too risky. I’m also concerned about the prospect of a long economic downturn in Britain and how this will impact profits at domestically-focussed cyclical stocks like this.
The IMF just downgraded its 2021 growth forecast for the UK, to 6.8% from 7%, and predicts that Britain will have the longest pandemic-related economic hangover of any G7 nation.
Moreover, I’m concerned by the threat posed by digital-led challenger banks like Starling and Monzo. Lloyds will have to invest massive sums in technology to compete with these new kids on the block.
But even then the FTSE 100 bank might struggle to win business as the market becomes more and more crowded. US banking giant JP Morgan launched its Chase challenger bank last month, the latest danger to Britain’s established players.
The long-term outlook for Lloyds and, by extension, its share price remains packed with danger then. So why take a risk? I believe there are much better cheap FTSE 100 stocks to buy right now.