2 reasons why Lloyds’ share price is so cheap!

At Lloyds Banking Group (LSE:LLOY) share price has jumped 15% in 2023. But on paper the bank still looks like one of FTSE 100The highest value of the stock.

Today the stock trades at a forward price-to-earnings (P/E) ratio of 7.1 times. This is also below the FTSE index average of around 13.5 times.

It also has a dividend yield of 5.3% for 2023, higher than the FTSE 100 average of 3.6%.

So why is the Lloyds share price so low? And should I buy a bank for the portfolio? Here are two reasons why it has such a low rating today.

#1: A worsening economic outlook

Banks are one of the most cyclical stocks. When economic conditions worsen, profits can tank while bad loans can go through the roof.

Lloyds itself has approved more than £1bn in loan repayments. And even bigger disruption costs are likely to come when the full-year results are released on Wednesday, February 22.

High street rivals Virgin Money put aside an extra £66m for the three months to December, announced last week. This underlines the huge stress on Britain’s banks in 2023 and possibly beyond.

Worryingly for the banks, the UK economic picture is grim and getting grimmer by the week. This is a particular problem for Lloyds given its focus on UK customers.

Last week, the International Monetary Fund (IMF) cut its growth forecast for 2023. It now expects UK GDP to shrink by 0.6% this year, a revision from its October estimate of 0.5% growth.

The IMF believes that the UK will be the only major economy to reverse in 2023. In fact, the body increased its global growth forecast to 2.9% from 2.7%. Investing in banks with overseas operations may be a better option for me in the current climate.

#2: The sinking housing market

All of Britain’s major banks have a share of the home loan market. But Lloyds is particularly exposed to the downturn in the housing sector. It controls about 18% of the mortgage market.

Well, the long-term outlook for the home loan market is strong. As the UK population continues to grow and homebuilding increases demand for mortgages will naturally increase. And Lloyds can be in the box seat to exploit this growth.

However, tough conditions in the interim could hurt the bank’s profitability and hinder its ability to pay large dividends.

Bank of England data last week showed mortgage approvals fell to 35,600 in December from 46,200 the previous month. This is also the lowest figure since May 2020 when the Covid-19 lockdown was implemented.

Higher interest rates and tough economic conditions have also led to an increase in the number of people facing mortgage defaults.

Should I buy Lloyds shares?

I believe that the Lloyds share price is low for good reason. And I won’t buy bank stocks because of that threat. I prefer to invest in other cheap UK stocks for passive income in 2023.