Is Lloyds’ share price too cheap for investors to ignore?

At Lloyds (LSE:LLOY) share price will lose 8% of its value in 2022. But investors want to FTSE 100 The bank has picked up on New Year’s trading. Can the market bet that the bad news is now worth the company?

On paper, Lloyds shares certainly look cheap. They trade at a price-to-earnings (P/E) ratio of 6.5 times. This is also below the FTSE index average of around 13.5 times.

Should investors buy Black Horse Bank for their portfolios? Or do the risks facing banks remain too severe?

A gloomy sight

I am reluctant to buy Lloyds shares for my own portfolio. I have been put off by the large sums that have had to be set aside in recent months to cover bad debts.

This totaled more than £1bn between January and last September. More serious loan defaults are likely to come down when the full financial year comes out on February 22nd as well.

Retail banks are very sensitive to economic conditions. So the forecast that the UK economy will continue to shrink until 2024 has me nervous. I imagine a rise in bad debt and a long-term decline in profits.

… or is it?

This gloomy forecast is shared by far-reaching economists. Bank of England, Office for Budget Responsibility, and Goldman Sachs only a few bodies forecast weak economic conditions until next year.

However, some predict that the UK economy may not be worse off than other major economies. For example, Oliver Rust, head of product at independent inflation data aggregator, Truflation.

Rust says that “The UK is certainly in a tough spot, but will it suffer more than other economies in the G7 – and like Russia – I’m not sure“. He continued”many European countries and even Japan face similar challenges and it is unlikely that the UK will fare worse.“.

The OECD predicted in late November that the UK economy would be the worst among a group that also included Canada, France, Germany, Italy, Japan, and the US.

These concerns are particularly bad for Lloyds’ share price in 2022. This is due to the company’s focus on the UK. So a better-than-expected economic performance on the coast could help lift the FTSE 100 bank back if it translates into better profits.

Verdict

As a value investor, I see clear appeal in Lloyds shares. But now I am still reluctant to buy it for my portfolio.

I’m not just concerned about short-term income prospects. I think banks could be set for longer-term pressure as the UK adjusts to life post-Brexit and other major structural challenges. Low productivity, high national debt, and a steady decline in production are just some of the problems that can slow down GDP growth.

I am also concerned about Lloyds’ future profitability as competition from digital banks and challengers increases. Facing a steady decline in market share as consumers respond to online-led carriers. All things considered, I’d rather buy another cheap UK stock today.