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Lloyds Banking Group (LSE:LLOY) share price has gained renewed momentum in the last few sessions. It has risen 7.3% in just three weeks as dipped buyers have capitalized on recent weakness in the FTSE 100 banks.
However, at current prices, Lloyd’s stock still looks like a steal. At 45.8p per share, the company trades on a forward price-to-earnings (P/E) ratio of six times. This is well below the FTSE Index average of 14 times.
Black Horse Bank is also offering a handsome 6.1% dividend yield at current prices. It sailed above the corresponding 3.8% average for UK blue-chip stocks.
So is the company a top buy for value investors?
Bad loan blues
In my opinion, Lloyds stock should be avoided even if it’s cheap. I believe their cheapness is a fair reflection of the enormous risk they pose to investors.
One of my main concerns is the possibility of a sharp increase in loan depreciation as companies and individuals struggle to make ends meet. The Bank of England’s interest rate increase pushed up the profits that banks earned from their lending activities. But they also threaten to increase the number of bad loans on their books.
For example, today’s data shows the number of corporate bankruptcies jumped 27% in June. It also revealed quarterly bankruptcies rose above 6,000 from April to June, the first time they broke this level since the financial crisis.
Nicholas Hyett, investment manager at the Wealth Club, comments that “the only time things looked sour was during the early ’90s recession”. High inflation means interest rates tend to continue to rise as well. So business failures can keep coming quickly.
Retail banks are also facing a steady increase in bad credit rates among individuals. The pressure on mortgage holders is intense at the moment due to the Bank of England raising interest rates.
This is a problem for Lloyds considering its large home loan book. The total mortgage balance here stands at £309.5 billion by the end of 2022. This gives the bank a huge 19% market share.
FCA spoke loudly
Rising write-downs aren’t the only worry for banks, either. The Financial Conduct Authority (FCA) has threatened to get tough amid accusations that banks failed to raise deposit rates to the extent they should.
FCA chief executive Nikhil Rathi told lawmakers today that “enforcement action” could occur under the new rules later this month. Rules that narrow the difference between the interest rates that banks charge borrowers and savers could, in the current environment, make it difficult for Lloyds to grow any profits at all.
The dismal outlook for the UK economy beyond 2023 suggests banks could also deliver underwhelming returns in the long term.
There are many FTSE 100 stocks that trade at low P/E multiples and offer great dividend yields after the recent market volatility. So I was happy to ignore the ‘cheap’ Lloyds stock and buy another British stock with my hard earned money.