When it comes to private investors’ favourite stocks, Lloyds Banking Group (LSE: LLOY) is streets ahead of the rest. A quick glance at the share register, highlights that over 80% of the total number of shareholders own less than 1,000 shares. Indeed, individuals with less than 10,000 shares take that figure to a whopping 97.26%.
However, such loyalty shown by its army of private investors has been misplaced. In the last 10 years, on an adjusted returns basis, for every £1 invested, the return was 52p. Even on a nominal basis, the return was only 70p.
But as net interest income begins to rise, some hope the Lloyds share price could rise strongly. So, is now finally the time for me to buy?
Cautious optimism
In its Q1 statement, Lloyds reported a 12% rise in total income compared to the same period in 2021. Operating costs also saw a 2% reduction. However, despite these positive figures, underlying operating profit fell by 7% to stand at £1.8bn.
Driving this reduction, was a net impairment charge of £177m, compared to a £360m net credit in Q1 2021.
Loans and advances to customers rose £3.2bn in the quarter. This reflected strong growth in the open mortgage book of £1.7bn. The bank also saw customer deposit inflows increase £4.8bn.
The group experienced good organic growth in its insurance and wealth division, with £2bn net new money in open book assets under management.
Calm before the storm
In light of this solid financial performance, management enhanced its guidance for 2022. It now expects net interest margin to be above 270 basis points (or 2.7%). Return on tangible equity is expected to be greater than 11%.
However, storm clouds are gathering. Although coming in lower than expected, a net impairment of £177m is the key metric for any investor.
The bank upgraded its economic forecasts for 2022 based on the fact that higher inflation is being offset by surging house prices and low unemployment. However, I am not convinced.
House price inflation remains strong, but for how much longer? The cost-of-living crisis, I believe, has a long way to run. There’s no indication that energy and food prices have peaked. Eventually, this will feed into the mortgage market. First-time buyers, who make up about a quarter of the market, will struggle to raise the necessary deposit to secure their first home.
I also remain concerned about the historically low unemployment figure. Firstly, very few companies do well in high inflationary environments. Secondly, there’s a severe disconnect between aggressive fiscal policy and low unemployment. Normally, one would only expect to see high levels of government debt during downturns.
Would I buy Lloyds?
So would I buy? The short answer is no. I believe that the business cycle is turning. Recessionary indicators are piling up, not least, rising bond yields.
My fear is that we’re heading for a 1970s-style stagflationary environment. This is characterised by wage price spirals, low growth and runaway inflation. Such a setting, is the worst cocktail for any bank. For Lloyds’ business model, predominantly built on mortgages, credit cards and commercial banking, it could be bad news. I expect it to stay a penny stock for some time.