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Lloyds Banking GroupS (LSE: Loy)’s share price rose an impressive 10 per cent in September. Demand for the bank’s stock is rising as investors anticipate a sharp rise in interest rates in the coming months.
Lloyds was the most bought UK share last week. Hargreaves LansdowneS Investment platform. in fact FTSE 100 The stock has a large share of 11.83% of all buy orders.
So should I consider investing in a bank today? Or would I be better off buying other UK stocks for my portfolio?
Great universal value
It’s hard to argue that Lloyd’s stock price looks very attractive right now. As a value investor, he is drawn to his winning combination of low earnings multiples and large dividends.
City brokers expect Lloyds to post earnings per share (or EPS) of 7.2p in 2022. At around 47.8p in bank trading, this yields a price-to-earnings (P/E) ratio of 6.6 times.
To put this in context, other FTSE 100 banks NatWest And HSBC Trade at multiples of 8.5 times and 8.1 times. And the wide footsie average sits at 14 and a half times.
In terms of dividends, Lloyd’s shares currently command a 5% dividend yield. This beats the 3.9% FTSE 100 average by a good margin.
Rate the support
As I mentioned, market expectations for higher interest rates have fueled appetite for Lloyd’s shares. Banks make huge profits from the landscape, such as the difference in what they charge borrowers and what they expand to savers.
This difference is known as the net interest margin. And higher interest rates in the first half of 2022 and a year ago pushed Lloyds’ margin to 2.77 percent from 2.5 percent. In turn, the bank’s net income rose 12% year-on-year to £8.5bn.
Encouragingly for Lloyds, the Bank of England has predicted that it will continue to hike rates during this period of high inflation. A 0.5% increase is widely expected when policymakers meet next week. Although a 1% rise is being proposed by some in response to a weaker pound. Such a scenario could set fire to Lloyds’ share price.
Despite this support, I would not consider buying Lloyds. And it’s not just because the bank faces the threat of a drop in profitability in the coming months (Lloyds has set aside £377m to cover potential bad loans in the first half).
I am happy to pass on the stock as it has a poor long-term outlook.
Poor earnings have been the bank’s problem. This has resulted in a 16% drop in share price over the past five years. And while higher interest rates are currently helping, the Bank of England has signaled it will start cutting again in the second half of 2023.
It is expected that the threat posed by challenger banks will continue to intensify. And Lloyd’s focus on Britain poses an added risk given the prospect of a coronavirus-related and Brexit-related economic slowdown.
All things considered, I’d rather ignore Lloyds and buy other cheap UK stocks today.