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Lloyds Banking Group (LSE:LLOY) shares are currently (11 September) changing hands for 82p. Compared to five years ago, that’s an increase of 216%. This makes it the 11th best performer on the FTSE 100 over this period. But despite being one of the post-pandemic success stories, I’m not interested in taking a stake.
Let me explain.
1. Too expensive
Based on its reported profit over the past 12 months, Lloyds has a price-to-earnings (P/E) ratio of 12.3. This is pretty much in line with the average of the FTSE 100. However, generally speaking, banks attract a lower earnings multiple than other sectors. Indeed, of the five banks on the index, the average is 8.6.
| Stock | Price-to-earnings ratio |
|---|---|
| Lloyds Banking Group | 12.3 |
| NatWest Group | 8.5 |
| Barclays | 8.4 |
| Standard Chartered | 6.9 |
| HSBC | 6.7 |
| Average | 8.6 |
The fact that Lloyds is such a big outlier — it’s 44% more than the next highest — puts me off.
Looking ahead, the situation improves. Analysts are expecting earnings per share (EPS) of 11.1p in 2027. This gives a forward P/E ratio of 7.4. However, if the bank were to meet this target, it would have grown its EPS by 76% in three years. That’s an annual growth rate of nearly 21%.
Such a stellar performance seems unlikely to me, because of the second reason why I don’t want to touch the stock.
2. Exposure to the UK
Nearly all of the bank’s earnings come from UK customers. This means it requires the domestic economy to flourish for it to grow significantly.
But most economic indicators appear to be going in the wrong direction. Therefore, I can’t see how the bank’s going to meet analysts’ expectations. Lloyds own ‘base case’ estimate for GDP growth this year is 1%. But the economy has already grown by this amount during the first seven months of the year. This implies that the bank’s expecting zero economic growth during the remainder of the year.
There’s also speculation that the chancellor might impose some form of windfall tax on Britain’s banks. Understandably, they are lobbying hard against such a move. But there is a hole in the nation’s finances, which needs to be addressed, somehow.
One glimmer of hope for Lloyds is that inflation is proving difficult to control. This means interest rates are likely to stay higher for longer, which should help its margin. However, the downside is that the risk of loan defaults is likely to increase further. It’s a fine balancing act.
Historically, the bank’s been a barometer for the UK economy. Therefore, in the short term at least, I’m concerned about its earnings.
3. Becoming unbalanced
One investment principle I follow is to keep my portfolio well diversified. This means spreading risk across several stocks in a number of different sectors. And because I already own shares in Barclays, I don’t want to hold another bank in my ISA.
Of course, there’s no rule against owning shares in more than one company in the same industry. But I don’t think my portfolio’s big enough to justify this.
With its above-average yield, Lloyds could appeal to income hunters. And brokers have a 12-month price target that’s 12% higher than its current share price. But I think there are better opportunities elsewhere. Maybe saying I won’t touch it with a bargepole is a bit strong. But at the moment, the stock’s not for me.
