Should I buy cheap Lloyds shares as the FTSE 100 rebounds?

At FTSE 100 continued to bounce back as worries about the recent banking crisis receded. At Lloyds Banking Group (LSE:LLOY) share price for example rose 4.7% in Tuesday trade above 48p.

Black Horse Bank continues to trade at a substantial discount to levels recorded just a week ago. This suggests that this week’s rally could be rescheduled.

All things considered, Lloyds might look pretty good for value stock lovers like me. Bank shares trade at a price-to-earnings ratio (P/E) of 6.4 times for 2023. They also bring a juicy 6% dividend yield, well ahead of the 3.8% FTSE 100 average.

All things considered, Lloyds might look pretty good for value stock lovers like me.

Cheap but risky

But on balance I believe Lloyds shares remain very risky, even at current prices. And I’m not even talking about the threat of contagion in the banking sector after the collapse of Silicon Valley Bank.

At this stage, UK banking disaster does not appear to be on the horizon. Supporters of the Bank of England have claimed that “The UK banking system is well capitalized and funded, and remains safe and sound“.

However, I am concerned about the potential for a bank crisis in Lloyds profits. More specifically, policymakers could delay or cancel further interest rate hikes. The move could reduce the difference between the interest charged by lending banks and what is given to savers.

The Bank of England may continue to tighten policy as the prospect of high inflation benefits retail banks. But speculation is mounting that rate hikes will end in a bid to reduce market volatility.

Decisions by policy makers may be made. But this is just one of several big risks to Lloyds earnings in the near future and beyond.

another danger for Lloyds

For one, banks are one of the most cyclical companies. When economic conditions become challenging profits can fall off a cliff. Lloyds itself took £1.5bn of loan losses last year as consumers and businesses struggled.

Unfortunately, economists expect the UK economy to remain ill for some time. The OECD, for example, expects UK GDP to shrink in 2023 and rebound to less than 1% next year.

Lloyds does not have the exposure in overseas areas to compensate for its weakness at home. So unlike other FTSE 100 banks like Barclays and HSBC it cannot be seen for foreign clients to drive the bottom line.

Here’s what I’m doing right now

Buying UK shares quickly can be a great way to build wealth. Just ask Warren Buffett, who has made billions by investing in stocks when the market is falling.

But I believe that buying Lloyds remains a bad idea despite the current share price decline. There are many other FTSE 100 stocks currently trading at their fundamental valuations. So I looked for other cheap blue-chip stocks to buy.