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2 reasons to feel nervous about the Lloyds share price

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It is almost 15 years since the last financial crisis began and a lot has changed since then. For example, some of the banks that suffered badly in that crisis, such as Lloyds (LSE: LLOY), have rebuilt their balance sheets with the intention of making them stronger. But the Lloyds share price has still never reached anywhere near where it was before the financial crisis.

With the economic outlook currently looking highly uncertain, could that be bad news for Lloyds shareholders like myself? I fear it could. Here are two concerns I have.

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Narrow focus

Some UK-based banking peers such as Barclays, HSBC and Standard Chartered conduct lots — or even most — of their business overseas. By contrast, Lloyds’ strategy has been to focus on the domestic market. It has also stuck to retail and commercial banking, avoiding getting involved in large-scale investment banking.

But the UK economy faces sizeable challenges. Inflation and cost of living concerns are common across European markets, not just the UK. But as the nation continues to find its own way economically following Brexit, such issues could have a disproportionate effect on the UK economy. For example, increased customs paperwork has pushed many prices up in the UK compared to neighbouring countries.

Lloyds’ narrow focus concentrates its risk. If the UK economy suffers and loan defaults rise, that could be bad news for the bank. In its first-quarter results yesterday, the bank booked a £27m charge due to what it termed “economic outlook revisions”. I think there could be a lot more of that to come in the next couple of years. That eats into profits.

The flip side of this is that Lloyds’ strategic focus makes it less likely for the bank to trip up on some exotic overseas misadventure, as has happened to other banks in the past such as Barings. I see that as positive for the Lloyds investment case.

Dividend dithering

Lloyds has restored its dividend after being required by regulators to suspend it during the pandemic. But it remains markedly smaller than before. The company’s launch of a share buyback makes me think management does not see restoring the dividend to its old level as an urgent priority.

While some shareholders may be happy with dividend rises of any stripe, others have bought into Lloyds expecting it to use its excess capital to fund bigger dividends. If that does not seem to be happening fast, they may sell up and hunt for yield elsewhere. That could hurt the Lloyds share price.

Is there a positive side to this? Arguably management prudence makes the dividend more sustainable even if profits fall. Personally, though, I would rather the bank increased its payouts in the short term.

My move on the Lloyds share price

I continue to hold Lloyds in my portfolio and these risks are not enough to make me sell the shares at the moment.

But after a strong run in 2020 and part of 2021, the Lloyds share price has only added 3% in the past 12 months. So far in 2022, it has fallen 7%. I think that reflects City concerns about potential risks ahead. I will be keeping a close eye on my position and will not buy more shares for now.

Read More: 2 reasons to feel nervous about the Lloyds share price

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