Is Lloyds’ share price the best bargain for FTSE 100 investors?

At Lloyds Banking Group (LSE:LLOY) has joined the broader FTSE 100 price increase at the beginning of 2023.

At 53.6p per share, Black Horse Bank is up 16% from the level recorded at the start of the year. But at current prices, the company still looks — at least on paper — like it might be too cheap to miss.

Lloyds shares are currently trading at a price-to-earnings (P/E) ratio of 7.1 times. On top of this, they offer a dividend yield of 5.2%.

Could this be Britain’s most valuable blue-chip stock?

Saying rate

High inflation has been difficult for consumers over the past year. But it has been a boon for UK banks as it has translated into rapid rate hikes from the Bank of England (BoE).

Rate increases boost bank profits by increasing margins on rates offered on savings and loan products.

Encouragingly for Lloyds et al, the BoE will also raise rates. The benchmark is expected to rise another quarter to half a percent from the current level of 4%.

That said, there’s no guarantee he’ll be any higher. There is also the possibility that interest rates could be cut later in the year to help Britain’s slumping economy.

In comments last month, BoE governor Andrew Bailey speculated that “the corner has been turned“in the fight against inflation. He also suggested that inflation will decrease “quite quickly“from spring. Does Threadneedle Street really want to keep hiking rates in this neighborhood?

Danger ahead

However, let’s put interest rate uncertainty to one side. The BoE’s policy may not boost Lloyds’ profits in 2023. But there are some more predictable reasons why the FTSE 100 bank’s earnings could drag.

One is that the UK economy is likely to outperform other developed overseas economies in the near term and beyond. This could mean a long period of weak profits and higher-than-normal loan impairments for UK-focused banks like Lloyds.

Economic forecasters are often wrong. But a raft of evidence paints a bleak picture for Britain and its economy. Inflation is falling but remains higher on these coasts than elsewhere. Other structural problems such as low productivity and labor shortages are also more evident here than elsewhere, and cast a long-term shadow on the bank.

I am also concerned about the rising competition that high street banks like Lloyds face. On the plus side, the company continues to cut the number of branches it operates to reduce costs. This will make it better to compete with ultra-attractive products that can be offered by online-only banks.

But the costs here remain substantial, as is the bill Lloyds has incurred to boost its digital services. It plans to spend £4bn over five years to achieve its goals. And of course there is no guarantee that such a transformation strategy will work against digital operators who continue to increase their market share at a rapid pace.

As I say, the Lloyds share price looks cheap on paper. But for me the low price is enough to reflect the huge risk that the bank is taking for investors. I prefer to buy more cheap FTSE 100 stocks for my portfolio.