The Lloyds Banking Group (LSE: LLOY) share price remains well below the levels recorded at the start of 2022. However the FTSE 100 bank has roared back into life more recently. Lloyds shares have risen by around 8% in value in just a month.
Is the worst behind the Black Horse bank? And should I be tempted to buy its shares today?
Rate rises
Investors have been piling into Lloyds on signs that interest rates will keep on rising. This is a big benefit to banks as it widens the difference between the rates they offer to borrowers and to savers. Indeed, the impact of recent Bank of England (BoE) action to Lloyds was revealed in its first-half trading statement. The Footsie bank’s net interest margin jumped to 2.77% from 2.5% a year earlier.
Noises coming out of the BoE are suggestive of more rate hikes too. Deputy governor Dave Ramsden said this week that “it’s more likely than not that we will have to raise the Bank rate further.”
Uncertain outlook
It’s too early to claim that Lloyds is out of the woods though. After all, economic forecasts for the next 12-18 months remain pretty chilling.
Inflation is tipped to remain a significant problem for British consumers and businesses. The Resolution Foundation thinktank for instance thinks inflation might hit 15% at the start of 2023.
Worries over UK inflation remains a common theme among economists. The International Monetary Fund (IMF) actually slashed its GDP forecasts in late July because of this. It now thinks Britain’s economy will grow just 0.5% in 2023.
Like the Organisation for Economic Co-operation and Development (OECD) forecasters, the IMF expects the UK to post the lowest growth among G7 nations next year. Given these estimates, the profits outlook for Lloyds is less than encouraging.
Cheap for a reason?
I think a case could be made that Lloyds’ cheap share price reflects this tough picture however. A forward price-to-earnings (P/E) ratio of 6.6 times sits well inside the widely-accepted bargain benchmark of 10 times and below.
But I’m not tempted to buy Lloyds shares despite their low valuation. Not only do I fear a slew of cuts to profits forecasts that could pull the bank’s share price lower. I don’t find the company’s long-term investment case particularly attractive either.
I certainly don’t expect the bank to generate strong earnings growth, given its lack of international exposure. The likes of Standard Chartered and HSBC for instance have significant operations in Asia. Banco Santander has a huge customer base in North and South America. TBC Bank is a major player in the up-and-coming Georgian banking sector.
Low financial product penetration, coupled with soaring wealth levels in these regions, provides exceptional profits opportunities for these banks. By comparison, Lloyds might struggle to grow profits over the next decade, providing limited shareholder returns versus the wider sector.
Therefore, the bank’s ultra-low P/E ratio and large 5.6% dividend yield aren’t enough to encourage me to invest. I’d rather find other bank stocks to buy today.