The Lloyds Banking Group (LSE:LLOY) share price has fallen 8% in 2022. The broad view of City analysts is that the FTSE 100 bank is now an attractive stock to invest in.
Stock screener Digital Look says 13 brokers with ratings on Lloyds shares class them as a ‘buy’. Six are neutral while only two say they’re a ‘sell’.
Will the Black Horse Bank’s share price rebound in 2023? And should I buy the company for my portfolio today?
2 reasons to buy the shares
Rising interest rates have been a big boost to banks’ profits in 2022. At Lloyds, net income leapt 12% between January and September to above £13bn. Higher rates boost the margin between the rates banks offer to borrowers and to savers, giving profits a lift.
Encouragingly the Bank of England is tipped to keep hiking rates next year too in order to reduce high inflation. Analysts at Standard Life think the base rate will end 2023 at 4.5%. That’s up a full percentage point from current levels.
Another reason to buy Lloyds is its ultra-low share price. The firm trades on a price-to-earnings (P/E) ratio of 6 times for 2023. It also carries a market-beating 6.1% dividend yield.
To put this in perspective, the FTSE 100 forward average yield sits way back at 3.7%. Furthermore, the bank’s predicted dividend for next year is covered 2.7 times over by anticipated earnings. This suggests it could be a solid pick for passive income next year.
3 reasons to avoid the shares
Okay, Lloyds shares look like great value on paper. But low valuations like this often reflect significant profit risks. This is certainly the case with Lloyds, in my view.
Britain’s banks face a toxic mix of weak revenues and rocketing loan impairments as the UK economy stalls. Economists at KPMG expect a recession lasting until the end of next year too. They predict a meagre 0.2% GDP rise in 2024 as well.
This is a particular danger to Lloyds given its focus on UK retail banking. What’s more the bank’s narrow geographic focus could also undermine its ability to robustly grow earnings over the long term.
HSBC is pivoting ever closer to fast-growing Asian markets, for example. Santander has massive exposure to Latin America. These territories have considerable room for growth given low financial product penetration rates there and rocketing personal wealth.
Lloyds’ ability to make strong profits will also be threatened by the growth of digital-led banks. EY Club says that digital bank revenues soared at a compound annual growth rate (CAGR) of above 750% between 2018 and 2021.
FTSE 100 banks are investing heavily in their digital operations to stop customers leaving in their droves. This is putting even more pressure on earnings and thus shareholder returns.
The verdict
At first glance Lloyds shares look too cheap to miss. But I find the bank an unattractive investment given its woeful near-term outlook and its weak profits picture over the longer term.
I think there are much better value stocks available for me to buy for next year.
