I think Lloyds Banking Group’s (LSE: LLOY) share price could be set for heavy weather in 2022. So while it looks cheap at current levels of 47.8p I won’t be buying the FTSE 100 bank for my shares portfolio.
City analysts are expecting Lloyds’ profits to fall heavily next year following 2021’s rebound. Consensus suggests that earnings will drop 23% year-on-year. However, these predictions leave Lloyds’ share price with a rock-bottom price-to-earnings (P/E) ratio of 7.7 times. This is well inside the widely-accepted bargain benchmark of 10 times and below.
Lloyds also offers plenty of value in terms of dividends. The bank’s yield sits at 5.3% for next year, well above the forward FTSE 100 average of 3.5%.
Looking on the bright side
A cheap share price doesn’t necessarily mean it’s a good deal for investors, however. Indeed, I think Lloyds’ low valuations reflect the serious risks it faces in the near term and beyond. I believe cyclical UK-focused shares like this could get hammered in 2022 as the economy toils.
On the plus side though, it looks as if interest rates could rise several times over the next few years. The Bank of England’s decision to increase rates in December signals a more aggressive course of action to combat soaring inflation. This would enable Lloyds and its peers to make more money from their lending activities.
Moreover, it appears as if conditions in the British housing market will remain robust for some time to come. This is a big deal for Lloyds as it’s the country’s biggest mortgage product provider (with a market share of around 20%). Real estate services specialist Savills has predicted further property price growth in 2022 thanks to reliably strong homebuyer activity. It’s pencilled in average home price growth of 3% to 5% next year.
Why I fear for Lloyds’ share price
But I’m afraid that these rays of sunshine don’t offset the dangers facing Lloyds and its share price. I think loan impairments could spike and revenues sink as the Covid-19 crisis, persistently strong inflation and extra Brexit regulations hit the economy. There’s a good reason why economists have been downgrading their GDP forecasts in recent months.
According to the Resolution Foundation, 2022 will be the “year of the squeeze” because of rising taxes and surging energy bills. They expect households to take an average hit of £1,200 in a worrying signal for consumer spending and the broader economy.
This follows predictions from trade credit insurer Atradius that corporate insolvencies could soar next year. They reckon the number of insolvencies could jump 33% in 2022 versus pre-pandemic levels. Government furlough support helped a vast number of distressed firms survive during 2021 and 2022, assistance which has since been withdrawn.
So I’m happy to ignore Lloyds and its cheap share price. Why take a chance with such a high-risk stock when there are many other cheap UK shares to choose from today?