There’s been an awful lot going on in the banking sector with high volatility over the past few weeks. It doesn’t look like we’re completely out of the woods even now. As a result, stocks such as Lloyds Banking Group (LSE:LLOY) have dropped in value. In fact, Lloyds shares are currently at their lowest since last December, trading below 46p. Is it just a dip or the start of a longer down trend?
Caught up with banking fear
Even though the stability of Lloyds specifically hasn’t been called into question, the broader sector has. The failure of US banks including Silicon Valley Bank (SVB), as well as European peers such as Credit Suisse has caused investors to panic.
I don’t see this as a company-specific risk for Lloyds. To begin with, SVB failed because of the way it managed deposits and liquidity. Lloyds doesn’t have this same problem because it has a large lending portfolio. This includes products such as mortgages. As a result, it isn’t exposed in the same way as the American bank was.
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Lloyds also doesn’t have the same problem that Credit Suisse had. The Swiss bank was dogged by scandals relating to large institutional clients such as Archegos Capital and Greensill Capital. This caused billion dollar losses for the bank over the past few years. Lloyds is predominantly a retail-focused bank and doesn’t cater to higher-risk funds like Credit Suisse did.
Therefore, I feel that Lloyds shares have simply been caught up in the general negative banking sentiment at the moment. In the long term, I expect people to realise that Lloyds isn’t the same as the others, which should help the share price to rally back.
Points to remember
Despite my optimism regarding Lloyds shares, there’s a problem. The bank isn’t a growth stock, and so even if it makes back all of the losses and reaches 52-week highs, it’s only a 17% return from current levels.
Don’t get me wrong, that’s not a disaster, but it’s what I see as the best-case scenario. It might not even reach that level. For example, the share price could be weighed down by lower consumer spending due to the cost-of-living crisis. Inflation is still running at 10.4%, so many will continue to feel the pinch over the course of 2023. It could cause people to be put off getting a mortgage, which would be bad for business at the bank.
Lloyds also isn’t really in a position to take advantage of other banking problems. For example, HSBC struck a great deal in buying the UK arm of SVB on the cheap. Yet Lloyds doesn’t really have the same firepower or financial reserves to buy a struggling peer, in my opinion.
My overall view
Do I think that Lloyds shares will be higher at the end of the year than where they are now? Yes. But do I think there are better opportunities elsewhere (even in the banking space) to make higher returns? Yes. I’d rather invest in a stock like Barclays right now. Therefore, I’m going to say thanks, but no thanks, to Lloyds.
