4 good reasons I’m avoiding Lloyds shares at all costs!

At Lloyds Banking Group (LSE:LLOY) share price in February 2019. But the bank is still 12% more expensive than at the start of 2023.

Like billionaire investor Warren Buffett, I’m a fan of value stocks. And at around 52.7p per share, Lloyds shares continue to trade at a good price, at least on paper.

At FTSE 100 the bank trades in the forward price-to-earnings ratio (P/E) of only 5.3 times. It also carries a current index-beating 5.7% dividend yield.

4 big risks for Lloyds shares

Stronger-than-expected economic data from the UK has boosted Lloyds’ share price. This has led to speculation that the UK-focused bank could turn in better profits than City analysts had predicted.

This is possible and may bring higher stock prices. But for me the risk of investing in FTSE businesses remains too high for now. Here are four reasons why I’m avoiding bank stocks today.

Uncertain interest rates

Higher interest rates have boosted bank profits over the past year. And further increases are predicted in the coming months, increasing Lloyds’ profits in lending activities.

But rates could fall sharply in 2023 as inflation normalizes and the Bank of England tries to stimulate the economy. Traders and economists have consistently lowered their rate expectations in recent weeks and this is something investors should keep an eye on.

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Credit losses are rising at UK banks and Lloyds itself is setting aside £1.5bn by 2022 to cover bad loans. As consumers and businesses feel the pinch, the cost of disruption could continue to climb higher.

I am very concerned about the huge debt people are taking on during this cost of living crisis. Credit card borrowing in the UK was at its highest since 2004 last year. The banking business may be under a ticking time bomb.

Weak housing market

Lloyds may be at particular risk given its position as the UK’s largest mortgage provider. The Financial Conduct Authority has warned that 750,000 homeowners could default in the next two years.

On top of this, banks can expect profits made in mortgage operations to decline as property prices fall. Zoopla says that 40% of properties listed on its website have had to reduce their asking prices due to increased buyer demand.

Rising competition

Finally, established banks are losing market share as consumers become challenger banks. Impressive customer satisfaction scores and attractive products have led to major disruption for Lloyds.

The problem could get worse as regulators consider loosening rules on new banks to increase competition. He said that taking action in areas like bank disclosures “remove barriers to entry.”

Verdict

When combined, I think all these risks make Lloyds share the risk very far today. There are plenty of low dividend stocks in the FTSE 100 with brighter trading prospects than Black Horse Bank. So I prefer to buy more stocks for my portfolio.