Lloyds (LSE: LLOY) shares were in high demand last week. On AJ Bell‘s platform, the FTSE 100 bank was the most bought stock.
Why were investors scrambling to buy the shares? Believe it or not, AI.
Lloyds is now looking at data centres
According to the Financial Times, Lloyds is shortly about to push into US infrastructure and data centre investing. In an article posted last Tuesday (19 May), it said that the company is planning to create a US infrastructure bank with a focus on large construction projects.
The article went on to say that Lloyds would take a relatively cautious approach to lending in the US by participating in syndicated loans. According to people familiar with the matter, the bank has no intention of taking on Wall Street giants like JP Morgan and Goldman Sachs who are leading data centre financings.
Nothing confirmed yet
Now, while this all sounds exciting, it’s worth pointing out that it’s all just speculation at the moment. Nothing has been confirmed.
And even if it does happen, it may not be a success for Lloyds. This was highlighted in the comments section of the FT article.
“Staid bank with mainly retail operations mainly in the UK pushes into big-ticket loans to infrastructure investors in another country. What could possibly go wrong?” wrote one reader. “Talk about stepping outside your competencies. Red flag,” wrote another.
Worth a look near £1?
Could the shares be worth a look anyway? Potentially.
Lloyds has been performing pretty well recently. For example, in Q1, net income was up 9% year on year.
Meanwhile, the valuation remains low. At present, the forward-looking price-to-earnings (P/E) ratio is under 10.
Adding weight to the investment case is the dividend yield. This currently sits at about 4.3%, meaning that the shares could provide a healthy income stream.
Three risks to think about
On the downside, this bank is quite narrowly focused. Ultimately, its fortunes are heavily tied to the UK economy and housing market today.
This is a risk. Let’s face it, the UK economy isn’t exactly a picture of health at the moment – the growth rate is very low and unemployment is rising (it recently hit 5%).
Another risk is competition from new players such as Revolut. It was recently awarded a full UK banking license, meaning that it can now compete with Lloyds in areas such as lending and deposits.
I should also point out that AI could be a major risk to Lloyds. If a lot of people end up losing their jobs to AI automation, the bank could be looking at heavy loan losses.
Are there better opportunities to consider?
Personally, I see more appeal in the diversified banks. I’m talking about names like HSBC, Barclays, and JP Morgan (I own some shares here).
These kinds of institutions have lots of different ways to make money. For example, they can make money via investment banking, securities trading, and wealth management, as well as regular banking.
Given their diversified operations, I see them as less risky than Lloyds. In my view, they’re worth a closer look.
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Edward Sheldon owns shares in JP Morgan.
