Over the last 12 months, the Lloyds Banking Group (LSE:LLOY) share price hasn’t exactly been a stellar performer. The bank stock has delivered relatively flat returns despite operating in a more favourable environment.
After all, rising interest rates make its primary lending business significantly more lucrative. And even looking at its latest results, those benefits seem to shine through.
Despite this, shares continue to limp on, making many analysts believe a buying opportunity has emerged. But I’ve spotted something that makes me think it could be a value trap. Let’s dive deeper into what’s going on under the surface.
The bull case for the Lloyds share price
While my stance on this business is bearish, I can’t deny there are some encouraging factors to consider.
Looking at its latest half-year results, it seems rising interest rates are having the expected beneficial effect. Underlying net interest income came in 13% higher at £6.1bn versus £5.4bn a year ago. Meanwhile, the combined profits from its commercial banking and credit card divisions also delivered a respectable 5% growth.
As a result, net earnings before impairments grew at an impressive 34%! And seeing this level of growth from a gigantic bank is pretty rare in my experience.
After including impairments and taxes, the picture isn’t as rosy, with earnings per share falling from 5.1p to 3.7p.
Impairments are never fun to see, but as a proportion of total assets, they remain at a tiny 0.17%. Therefore, I’m not too concerned on that front. And as for taxes, the bank did commit to quite a significant deferral in the first half of 2021. These were temporary savings, so seeing the taxman take a large chunk this year isn’t surprising either.
Overall, the business seems to be performing admirably. So, why then is the Lloyds share price not reflecting this?
Investigating the problem
A large chunk of Lloyds’ lending business stems from issuing mortgages. In fact, out of its £456.1bn of issued loans, £309.7bn consist of just mortgages. That’s 68% of its lending activity.
By having such a large dependence on the housing market, the performance of this business is strongly correlated with the property sector. And upcoming forecasts for the housing market aren’t exactly positive.
Rising interest rates may mean larger profits from lending. But this also creates affordability problems exacerbated by the soon-ending Help To Buy government support scheme. As a result, a report by research consultancy group Capital Economics predicts that UK house prices will likely fall throughout 2023 and 2024.
Lloyds has subsequently updated its expected credit loss (ECL) model, showing a potential £2.2bn mortgage impairment in the worst-case scenario. That’s up from £1.4bn just six months ago. And impairment risk from its other divisions is also being revised upward as the risk of recession grows ever nearer.
In total, as much as £6.45bn in losses could emerge in a relatively short space of time. If this were to happen, the Lloyds share price would likely take quite a severe hit.
With that in mind, I’m steering clear of the banking stock for now. I believe there are far better buying opportunities for my portfolio today.