3 reasons I won’t touch Lloyds’ cheap share price with a bargepole!

At Lloyds (LSE:LLOY) share price in US Dollar since the beginning of 2023. FTSE 100 the bank still seems to give great value to investors.

For the year, the business is trading at a price-to-earnings (P/E) ratio of 6.8 times. It also offers a market-beating forward dividend yield of 5.7%.

But I’d rather buy another FTSE index stock right now. Here are three reasons why I avoid Lloyds shares.

#1: Interest rate disappointment

Higher interest rates have provided a boost to banks in England since the end of 2021. This is because the actions of the Bank of England have increased the margin between what banks offer to borrowers and savers.

Rates look likely to continue to rise as well as inflationary pressures remain. But I’m worried that they can’t move as much as predicted, putting the current earnings estimate for Lloyds in jeopardy.

In fact, market forecasts continue to decline and a peak of 4.25% is now the consensus bet for 2023, down from 4.5% just a few weeks ago. This reflects expectations of falling energy prices that will ease inflationary pressures.

Investors should also consider that the Bank of England may cut rates again sooner than expected in the second half of the year to support the ailing domestic economy.

#2: Increase disability

I am also concerned by the news that personal debt levels are rising in the UK. The number of people in mortgage arrears is rising and will rise above 750,000 in the next few years, for example.

This is a concern for Lloyds as the country’s largest provider of home loans. Bad loans may be released elsewhere as people borrow to make ends meet. The latest UK Finance data shows outstanding credit card balances rose by 10.1% (to £59.7bn) in the 12 months to October.

Lloyds is spending £1.05bn in the first nine months of 2022 to cover loan defaults. I expect greater expenses and profits to come as the year progresses.

The bank’s underlying profit fell 7% to £5.5bn between January and September due to severe impairment.

#3: Soaring Competition

At the same time, Lloyds’ earnings threaten to be further eroded by the growing popularity of digital banks and challengers.

These industry disruptors have a lower cost base because they don’t have physical locations. This allows them to offer better product rates, better customer rewards and lower costs than their established competitors.

As a result, digital operators are rapidly gaining market share from Lloyds. It’s a trend that looks set to continue, even as high street banks close branches to better compete.

As I say, Lloyds shares look cheap on paper. But it represents a major threat to the company’s current earnings forecast. I would rather invest in other cheap UK stocks today.