Today I’m searching for the best cheap FTSE 100 bargains to buy for my portfolio. Focusing on great value stocks has served many successful investors (like billionaire Warren Buffett) well. While I might not make billions with this strategy it may help me make a big stash of cash!
Lloyds Banking Group (LSE:LLOY) is one UK share that offers excellent all-round value on paper. The ‘Black Horse Bank’ trades on a forward price-to-earnings (P/E) ratio of six times. It also carries a juicy 6.2% dividend yield for 2023.
Should I buy it for my ISA, then?
Earnings growth
City analysts expect Lloyds to grow earnings by single-digit percentages in 2023. This is thanks to expectations of ‘sticky’ inflation in the bank’s UK marketplace that could significantly boost its net income.
The sort of hefty prices rises we’re seeing mean the Bank of England looks almost certain to keep raising rates. Just today Jonathan Haskell, a member of Threadneedle Street’s rate-setting committee, said as much in The Scotsman newspaper.
It’s important we continue to lean against the risks of inflation momentum, and therefore that further increases in interest rates cannot be ruled out. As difficult as our current circumstances are, embedded inflation would be worse.
Jonathan Haskell
The question, of course, is just how much higher rates can go from current levels of 4.5%. A string of shocking inflationary readings suggests to me there could be much more to come.
Market expectations on future rates continue to climb too. They currently sit at around 5.5%, up around a percentage point from where they were at the start of the year.
Extra Bank of England rate rises would boost the profits retail banks make on their lending activities. Lloyds’ own net interest margin – which measures the difference between what these firms pay savers in interest and what they charge borrowers — rose 0.54% during the 12 months to March 2023.
Risky business
So why aren’t these ever-improving estimates pushing Lloyds’ share price higher? Well many investors (myself included) believe persistently high inflation, further rate action, and weak economic growth in the UK will have a significant net negative effect on the bank’s profits.
Not only could loan growth be choked off as consumers and businesses dial back their spending plans, lenders also face a sustained rise in heavy credit impairments as customers struggle to make repayments. Lloyds set aside another £243m in the first quarter alone to cover this eventuality.
As if this wasn’t enough, traditional banks like this face growing pressure from digital-led challenger banks. The lower cost bases of these new entrants allow them to (largely speaking) offer up better products, I feel. In this cost-of-living crisis, their superior savings and loan rates are especially appealing as consumers endeavour to save or to make money any which way.
The verdict
The problem for Lloyds is that these problems look set to last long beyond 2023. Competition looks likely to worsen, while the UK economy looks set for prolonged stagnation on a variety of structural problems.
There are plenty of attractive FTSE 100 value shares I’d rather buy right now.
