Stock market

Lloyds share price looks like a FTSE 100 bargain! What is the catch?

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Lloyds Banking Group(LSE:LLOY)’s share price has risen over the past two months. Yet at current prices of 50.7p per share FTSE 100 The bank still looks cheap across various metrics.

Its forward price-to-earnings (P/E) ratio is 7.9 times. This is comfortably 10.5 times the footsie average. Meanwhile, the 6.2% dividend yield on Lloyds shares outperformed the index average of 3.7%.

Finally, the bank’s Price-to-Book (P/B) ratio comes in at 0.7, indicating that it is trading at a discount to the value of its assets (minus its liabilities).

So why on earth is Lloyds’ share price so cheap? Let’s take a look.

Why I like Lloyds shares.

There is no doubt that Lloyds has some powerful weapons in its arsenal. As a major player in the UK mortgage market, it stands to benefit greatly from the recovery in the UK housing market.

Recent figures suggest the turnaround is already in full flow, with the Royal Institute of Chartered Surveyors (RICS) this week forecasting house prices to rise next year.

Lloyds also has significant brand power that helps mitigate the risk of rapidly expanding challenger and digital banks. Investing heavily in technology can also help businesses win in this new digital age.

The bank now has 21.5 million digitally active customers, which is about fifth by 2021.

Big threats

However, Black Horse Bank also faces significant risks in the near term and beyond. This in turn explains its rock-bottom valuation. And it’s making me wonder if Lloyds shares are too risky to buy even though they’re cheap.

A fresh rise in loan defaults is a significant threat to the bank’s bottom line. Bad loan charges cooled sharply in 2023, falling to £303m from £1.5bn a year earlier. But credit crunches are on the rise again and could remain problematic as long as the UK economy continues to struggle.

The Bank of England (BOE) says “Lenders reported that default rates for total unsecured loans rose in the first quarter.“and added”They were expected to increase in two quarters.It also predicted that defaults on secured loans would continue to rise.

The risk of a downturn has increased after the latest inflation data from the US this week. This suggests the BoE could keep interest rates on hold for longer, keeping pressure on borrowers’ finances.

The City now puts the odds of a May rate cut below 10%. And forecasts of cuts through August are also coming down.

Decision

The worry for Lloyds is that the UK economy points to remain weak for the foreseeable future. It’s a scenario that could keep income growth under wraps — and especially if interest rates begin to fall in late 2024 — as well as cause disruptions in the chain’s continuation.

Indeed, major structural problems (such as labor shortages, low productivity and fresh trade barriers) mean that the UK economy could implode for years to come.

That’s why, on balance, I want to find other cheap UK shares to buy now.


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