The FTSE 100 is home to some of the world’s greatest stocks. I myself hold a number of UK blue-chip stars including HSBC, Games Workshop, and Coca-Cola HBC. But like any share index, the Footsie also has its fair share of duds.
Take Lloyds Banking Group (LSE:LLOY). With price gains and dividends rolled up, the high street bank’s delivered a total return of 27% over 12 months. But for long-term investors it’s proven an underwhelming pick, to say the least.
Here’s why I’m avoiding this large-cap laughing stock this 1 April.
Long-term underperformance
Lloyds has been one of the FTSE 100’s best performers over the last year. But pull back a bit and the Black Horse bank has been far less impressive.
With share price gains and dividends combined, Lloyds shares have delivered an average annual return of 5% over the last decade. That’s half of what the broader index has delivered in that time — this sits at 10%.
Past performance isn’t a guarantee of future returns, of course. What I like about Lloyds is the work it’s carried out to transform its digital banking operation, bringing it closer in line to new consumer habits. Importantly, it’s also helping it to battle the challenger banks and to trim costs, giving earnings an added boost.
I also like Lloyds’ position as the UK’s go-to lender for millions of mortgage holders. The bank commands around a fifth of the total home loans market. As the government prepares to ramp up new home construction, it could enjoy a stream of new mortgage business.
Huge risks
The problem is that my positivity towards the business begins and ends here. I think things could get a lot harder from 2026 as the Middle East conflict boosts inflationary pressures. The war will also put added strain on the already weak UK economy.
In this landscape of poor growth and rising interest rates, retail banks could see an unwelcome return of weak revenue growth and soaring impairments. This was the story of much of the last decade, and kept Lloyds’ share price under constant pressure. That’s despite the boost higher interest rates have given the bank’s net interest margins (NIMs) in the post-pandemic period.
Unfortunately, this isn’t the only risk the bank faces either. Challenger banks look set to intensify their attacks on the established operators, putting their margins and revenues under pressure. There’s also enormous uncertainty over what the final cost of the motor finance mis-selling scandal will be. News of further loan provisions could prove catastrophic again for Lloyds shares.
Are there better stocks to buy?
What I find ridiculous is that Lloyds carries an enormous valuation in spite of these risks. At around 91p per share, the bank’s price-to-book (P/B) ratio is 1.3.
That towers above the long-term average of 0.9, and shows Lloyds shares trading at a premium to its balance sheet assets. Does this mean investors should consider buying other FTSE 100 shares this April? For me it’s a no-brainer.
