Is August the month that I should finally buy cheap Lloyds shares?


Young Black woman looking concerned while in front of her laptop

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July proved to be a wild ride for the Lloyds Banking Group (LSE:LLOY) share price. It dropped sharply in the second half of the month following earlier strength. And it’s continued this descent during the early days of August.

Yet at 43.3p each the FTSE 100 bank’s shares appear to offer exceptional value. They trade on a forward price-to-earnings (P/E) ratio of 5.7 times. This is below the UK blue-chip index’s average of 14 times.

Meanwhile its dividend yield for 2023 clocks in at 6.5%, way ahead of the 3.7% FTSE average. As a keen buyer of beaten-down bargains, is now the time for me to add Lloyds shares to my portfolio?

Robust results

The bank’s descent may, at first glance at least, appear puzzling given the strength of its half-year report released last month.

In it Lloyds said that income jumped 11% between January and June, to £9.2bn. This meant that pre-tax profit rose by almost a quarter (23%) year on year, to £3.9bn.

So the business — supported by a strong common equity tier 1 (CET1) capital ratio of 14.2% — lifted its interim dividend to 0.92p per share. This was up 15% from a year earlier, and comes on top of a £2bn share buyback it announced in February.

Revenues at Britain’s banks have been boosted by an unrelenting increase in interest rates. The good news for Lloyds and its peers is that the Bank of England isn’t done with its rate-raising cycle either. The smart money is on two further hikes to take the benchmark to 5.5%, up from 5% at present.

Reflecting this outlook, Lloyds raised its net interest margin (NIM) forecast for 2023, to 3.1%. That’s up fractionally from the 3.05% it was previously expecting. The NIM gauges the difference between the interest it charges borrowers and what it offers savers.

Why I won’t buy Lloyds shares

So why is Lloyds’ share price falling? First off, fears are growing that the bank’s NIM will come under increasing pressure as calls rise for savers to be offered better rates.

This week the Financial Conduct Authority warned that any operators that continue offering poor savings rates will face “robust action.” Fierce market competition means that high street banks may have to offer more attractive loans and savings products to prevent an exodus of customers too. These twin threats could take a big bite out of profits.

On top of this, investors fear a wave of bad loans might be coming as the cost-of-living crisis endures and the UK economy stalls. Lloyds put aside a whopping £662m in the first half to cover credit impairments, taking total charges since the start of 2022 above £2.2bn.

When the Bank of England stops raising rates in the coming months, Lloyds will have a mighty struggle on its hands to grow earnings. And it could remain under the cosh for years to come, given the weak economic outlook and backcloth of rising competition.

I believe the cheapness of the bank’s shares reflects its poor investment prospects. So right now I’d rather buy other FTSE 100 shares for my portfolio.



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