Are Lloyds shares a deadly FTSE 100 value trap?

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I’m searching for the FTSE 100’s best value stocks to buy this October. So I’m giving Lloyds Banking Group (LSE:LLOY) shares another close inspection.

On paper, the banking giant offers exceptional all-round value. It trades on a forward price-to-earnings (P/E) ratio of 5.8 times, well below the FTSE index average of 12 times.

Investors can also enjoy a 6.4% dividend yield at current prices. This sails above the 3.8% average for UK blue-chip shares.

Companies with rock-bottom earnings multiples and huge yields like this are often considered investment trap. However, City analyst don’t seem to think this FTSE company falls into that category.

Of the 18 brokers with ratings on the stock, 10 believe that Lloyds shares are a buy. Five are neutral on the bank while only three have slapped a sell rating on it. That’s according to stock screener Digital Look.

So is the Black Horse Bank a brilliant bargain or a potential wealth crusher?

The good stuff

Banks are critical components of any economy. The products they provide — like current accounts, loans, mortgages, and credit cards — help everyday life function smoothly.

This is why shares like Lloyds are so popular with investors. They receive regular income via interest and fees that they can then distribute to their investors through dividends. This particular bank certainly has a strong history of paying market-beating dividends.

Lloyds has an extra weapon up its sleeve too. It has one of the strongest brands in the UK’s banking sector and is often near the top of the ‘best buy’ lists. This gives it a clear advantage over much of the competition.

Incoming trouble

Having said all of this, domestic banks like this have a battle on their hands to grow profits in the current economic landscape.

A backdrop of elevated inflation means that the Bank of England could keep interest rates locked higher for longer. On the one hand, this may continue widening the difference between what banks charge borrowers and the rates they offer savers. But it’s also having a devastating impact on loan growth and loan impairments (Lloyds chalked up another £662m of bad loans in the first half of 2023).

Profits at banks are linked to the economic health of the territories in which they operate. The danger for Lloyds is that British GDP is tipped for a prolonged period of weakness. Growth of just 0.2% was reported for the second quarter, and recent manufacturing and services data suggests a contraction is coming at the end of the year.

Should I buy the shares?

A variety of structural issues including low productivity, regional wealth gaps, labour shortages and trade barriers mean trading conditions could remain difficult for years. But even when the good times return, major banks like this might strain to increase earnings.

One reason is that Financial Conduct Authority (FCA) is threatening to take action to narrow the difference between borrowing and savings rates. The consequences of any review could have huge implications for future profits.

High street banks also face increasing competition from challenger and digital banks. And they’re having to invest a fortune in technology to reduce the threat.

As I say, Lloyds shares are exceptionally cheap on paper. But I wouldn’t buy what I see as a potential investor trap.


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